Coordination in multi-echelon supply chain under supply and demand uncertainty

The main purpose of this paper is to study the inventory, production, and contracting decisions of a multi-echelon supply chain with both demand and supply uncertainty. We find that the commonly used wholesale price contracts used by both up-stream and downstream supply-chain members cannot coordinate the system. We then propose a returns policy used by the manufacturer and the retailer, combined with the wholesale price contract used by the raw-material supplier and the manufacturer, which can perfectly coordinate the supply chain. Through Nash bargaining analysis, we further provide contract terms that lead to win-win situation. We also investigate the impact of the supplier's risk attitude on the decisions, as well as the impact of spot market price for raw material on the performance of the entire supply chain. (C) 2011 Elsevier B.V. All rights reserved.