Random yield risk sharing in a two-level supply chain

Random yield affects production decisions and performances of all parties in a supply chain. We study a simple supply chain with one supplier and one retailer where there is random yield production and uncertain demand. We propose several risk sharing contracts that distribute the random yield risk among parties and evaluate the supply chain performances. We also compare the results of proposed contracts and find that under certain conditions, yield randomness might enhance the supply chain performance and decrease the double marginalization effect. Numerical examples are presented to illustrate the results. (C) 2007 Elsevier B.V. All rights reserved.