Coordination under random yield and random demand

Abstract

The aim of this study is to fill a gap in coordination literature by providinganswers to two distinct research questions on two different systems: A newsvendorsystem and an assembly system. First part of the study analyzes a newsvendor problem with random yield andrandom demand. Recalling the centralized solution, the system is decentralized andfive different contracts are studied. It is shown that some of the contracts coordinatethe chain while the others can coordinate with additional assumptions. In addition to the expected chain profit, variance of expected chain profit is written in closed formand the relation between the parameters and the expected profit and variance of theexpected profit and the optimal order quantity is illustrated with numerical examples.Second part of the study deals with an assembly system. As well as the demand, the yield of the suppliers are random. Concavity of expected chain profit of both two-supplier and N-supplier assembly system is shown. Instead of solving the optimal orderquantities explicitly, the expected profit of the manufacturer and the chain is written issuch a way that the manufacturer̕s function becomes a portion of that of the chain̕s.Four different contracts are proposed which are shown to coordinate the chain under forced compliance. The contracts are mixed type of contracts which includes paymentsfrom different contract schemes. Several different scenarios are created and numericalexamples for centralized solution and contract schemes are provided.