Coordination mechanism, risk sharing, and risk aversion in a five-level textile supply chain under demand and supply uncertainty

Abstract The textile supply chain has attracted worldwide attention because of its high volatility in apparel and cotton production due to coordination issue and yield uncertainty. In this context, existing analytical works related to coordination are restricted to a dyadic apparel retailer-manufacturer setting under demand uncertainty for the conventional manufacturer-led scenario. Several issues, such as the holistic depiction of the textile supply chain, impact of cotton production uncertainty, coordination mechanism for the emerging retailer-led scenario, and profitability issue of cotton firms, have not been paid enough attention. We propose an analytical model for a textile supply chain by adopting a five-level structure that comprises an apparel retailer, apparel manufacturer, textile firm, fibre firm, and cotton firm under simultaneous demand and supply uncertainty using a wholesale price contract. The wholesale price contract fails to coordinate the supply chain. Next, we show how the buyback contract and option contract coordinate this supply chain under manufacturer-led and retailer-led scenarios, respectively. Additionally, we discuss the improvement of cotton firm's profitability using a risk-sharing mechanism between the cotton firm and the fibre firm for the high loss-making scenarios. Also, we demonstrate how the risk-averse attitude of both the apparel retailers and the cotton firms can lead to the unsold cotton inventory problem. As extensions, first, we devise joint pricing and order quantity decision of apparel. Finally, we consider production uncertainties for all middle-level members in our proposed model and devise a buyback bidirectional sales rebate penalty contract for coordination.