Coordinating a three-level supply chain with effort and price dependent stochastic demand under random yield

One of the major objectives of modern supply chain management is dealing with the negative impact of decentralization among the involved entities and minimizing double marginalization effect within the chain, especially when the end-customers’ demand is not deterministic. This paper investigates coordination issue in a three-level supply chain with one raw-material supplier, one manufacturer, and one retailer. The retailer determines the retail price, sales effort, and order quantity simultaneously before the selling season starts. Both the supplier and the manufacturer face random yield in production. A composite contract having two components—a contingent buyback with target sales rebate and penalty between the retailer and the manufacturer, and a revenue sharing contract between the manufacturer and the supplier is proposed. The proposed composite contract is shown to achieve supply chain coordination and allows arbitrary allocation of total channel profit among all the chain members. The impact of randomness in both demand and production, and the impact of non-existence of emergency resource for the final product on the performance of the entire supply chain are analyzed. A numerical example is provided to illustrate the developed model and draw some important managerial insights.