A note on coordination in decentralized assembly systems with uncertain component yields

Gurnani and Gerchak [H. Gurnani, Y. Gerchak, Coordination in decentralized assembly systems with uncertain component yields, European Journal of Operational Research 176 (2007) 1559–1576] study coordination of a decentralized assembly system in which the demand of the assembler is deterministic and the component yields are random. They present incentive alignment control mechanisms under which system coordination is achieved. In this note, we extend Gurnani and Gerchak’s model to the case of positive salvage value and n asymmetric suppliers, and show that the shortage penalty contract which can coordinate Gurnani and Gerchak’s model no longer coordinates the extended model. Furthermore, we present a new kind of contract, surplus subsidy contract, to coordinate the extended model and prove that the profit of the supply chain under coordination can be arbitrarily divided between the component suppliers and the assembler.