Random yield and coordination mechanisms of a supply chain with emergency backup sourcing

Abstract

This paper considers a supply chain in which a buyer purchases finished items from a contracting supplier to satisfy a stochastic market demand, where the supplier’s production is subject to random yield. We assume that the buyer can make up the shortage by sourcing from an emergency backup supplier. We develop two Stackelberg game models, i.e. buyer-Stackelberg (BS) model and supplier-Stackelberg (SS) model, and find that the decentralised BS model results in a higher stocking factor of supplier’s input than the decentralised SS model. Compared with BS model, the buyer in SS model performs more explicit order plan, and we find that only when the actual yield of the supplier is insufficient, the buyer would use emergency backup sourcing to make up the shortage. When the manufacturing operation of the supplier is in the good state, the buyer only orders a certain amount and has some leftover. When the actual yield of the supplier is moderate, the buyer uses up every item produced from the supplier regardless of the yield rate. Comparing both channel structures, SS operation is a more effective way of controlling both inventory cost and backup sourcing cost, and it can be beneficial for each player as well as for the whole channel. Finally, we develop the coordination mechanism for each channel to investigate the issues of risk handling and risk sharing for uncertain demand and uncertain yield.

Keywords:

• supply chain management
• channel coordination
• game theory
• emergency sourcing
• random yield
• random demand

Acknowledgements

The authors thank an associate editor and anonymous referees for their numerous constructive comments and encouragement that have helped improve our paper greatly.

Funding

This work was partly supported by the National Natural Science Foundation of China [grant number 71201083, 71101054]; Jiangsu Province Science Foundation for Youths [grant number BK2012379]; the Fundamental Research Funds for the Central Universities [grant number NZ2012311].