Two-Echelon Supply Chain Coordination with Uncertain Demand

Coordinating producer and retailer is one of the main issues of supply chain management. This paper focuses on a decentralized system that consists of a producer and a retailer with the uncertainty of the market demand. The coordination necessity is analyzed by comparing the system with a centralized system for the total cost in the supply chain, and an incentive function comprising buy-back cost and penalty cost and a coordination mechanism is set up based on two incentive ways by buy-back contracts and penalty contract. Finally simulation analysis is done and the result shows that the coordination mechanism allows supply chain to achieve the optimal overall performance.