Supply chain coordination based on the probability optimization of target profit

Abstract

Supply chain management decision-making study mainly based on the ex-pected utility theory and most of the studies are obtaining the average values in the statistical sense. For Supply Chain (SC) decision-making individuals the statistical-based optimal profitability brings decision conflicts in the particular market within a specific period. Moreover, the small and medium outsourcing participants face unexpected outcomes which are the main cause of SCs disrup-tion. This study proposes a contractual coordination model that maximizes the probability of a pre-determined Profit Target (PT). The purpose of this paper is to reduce the influence of demand uncertainty with the high risk of unex-pected outcomes. We constructed the Revenue Sharing (RS) and buyback con-tract models within the SC participants' PT conditions and then discussed the SC overall performance. We simulated and analyzed the coordination condi-tions and the decision-making preferences of SC participants under the two contracts. From the comparison, under the PT strategy, the retailer is more willing to adopt the RS contract rather than the buyback contract. But the SC upstream supplier's contract selection decision depends on the specific con-tract parameters. Finally, numerical results indicated the contract selection de-cisions with the given PT of both SC participants.