Supply chain coordination with VMI arrangement under demand and supply uncertainties

Both demand and supply uncertainties are common occurrences in high-tech industry. This paper studies the issue of supply chain coordination under vendor-managed-inventory (VMI) arrangement, composed of a follower-manufacturer and a leader-distributor with uncertain demand and random yield. Two contracts are proposed to coordinate the decentralized supply chain, one is basic revenue sharing contract, and the other is revenue sharing plus risk sharing contract. Results show that basic revenue sharing contract cann't coordinate the supply chain under random yield and uncertain demand, but it can coordinate the supply chain only when there is only uncertain demand. Revenue sharing plus risk sharing contract can coordinate the supply chain, for it allocates the risk of yield and demand uncertainties to the manufacturer and the distributor. But the profit of the supply chain cann't be arbitrarily divided between the manufacturer and the distributor under the revenue sharing plus risk sharing contract, except that contract parameters are much larger.