Coordination of random yield supply chains with improved revenue sharing contracts

This article examines the role of revenue sharing contracts in the coordination of supply chains with random yield and stochastic market demand. With game theory models, we derive the retailer's optimal order policy and the supplier's optimal production policy under revenue sharing contracts. We find that the traditional revenue sharing contract is no longer able to coordinate the supply chain in the context of random yield and stochastic demand. Nonetheless, when combined with a surplus subsidy mechanism (improved revenue sharing contracts), it can coordinate the supply chain and simultaneously allow the supply chain profit to be divided between the two firms arbitrarily by choosing proper contract parameters. Finally, we illustrate the results via numerical examples.