| Summary: | Based on two substitute products, we study the inventory and contract coordination strategy of a three-echelon supply chain, which consists of two suppliers, a manufacturer and a retailer, under supply disruption and stochastic demand. We investigate the channel gross profit model of the centralized supply chain and obtain a unique optimal order quantity. Under a decentralized decision, we find that the commonly-used wholesale price contracts cannot coordinate the system. Then, we propose a buy-back contract and prove that this contract can more efficiently coordinate the system than the former. At last, we show that the integrated performance of the decentralized system can be maximized through choosing the buy-back parameter by the manufacturer and reveal that the effects of supply uncertainty and the substitution behavior of customers on the optimal decision by numerical examples.
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