Double marginalization and coordination in the supply chain with uncertain supply

This paper explores a generalized supply chain model subject to supply uncertainty after the supplier chooses the production input level. Decentralized systems under wholesale price contracts are investigated, with double marginalization effects shown to lead to supply insufficiencies, in the cases of both deterministic and random demands. We then design coordination contracts for each case and find that an accept‐all type of contract is required to coordinate the supply chain with random demand, which is a much more complicated situation than that with deterministic demand. Examples are provided to illustrate the application of our findings to specific industrial domains. Moreover, our coordination mechanisms are shown to be applicable to the multi‐supplier situation, which fills the research gap on assembly system coordination with random yield and random demand under a voluntary compliance regime.