Optimizing Supplier’s Replenishment Strategy in a Two-Echelon Supply Chain under Stochastic Lead Time

     All decisions made by each Supply Chain (SC) member can affect other members’ profitability. Replenishment decisions are among critical decisions within SC. inconsistency between SC members about replenishment decisions leads to a low SC service level. In this paper, a coordination mechanism for coordinating supplier’s replenishment decisions in a two-stage SC is developed. By modeling the ‘aggregate lead time’, the impact of supplier’s lead time uncertainty on SC service level is examined. In the next step, an incentive scheme based on ‘supply participation’ is developed in order to optimize supplier’s replenishment decisions. Based on the proposed model, supplier can benefit from financial assistance from the retailer for purchasing raw material, by re-setting its reorder point and also replenishment size on the optimal values. Numerical experiments show that: (1) In presence of uncertain supplier lead time, coordinating supplier replenishment decisions is beneficial, and (2) The proposed coordination model is capable of achieving channel coordination. Previous literature in this field have focused on coordinating downstream replenishment decisions while in this paper coordinating upstream replenishment decisions are investigated.