Supply chain coordination under financial constraints and yield uncertainty

A coordination problem for a supply chain with capital constraints and yield uncertainty is considered in this paper. In order to improve the supply chain, a buyback and risk sharing (BBRS) mechanism is proposed, in which the distributor shares the supplier's yield uncertainty risk by purchasing the overproduced products or waiving the shortage penalty, and the supplier shares the distributor's demand uncertainty risk by buying back the unsold products. The results indicate that, the profits and the strategies under the BBRS are the same with those under the centralised case. In addition, the proposed BBRS mechanism has a built-in mechanism to allocate the spillover profit between the supplier and the distributor. The results also show that the BBRS can increase the production quantity. Finally, we derive the bankruptcy probabilities for both the supplier and the distributor, and the probabilities depend on their initial capitals.