Supply Contracts with Service Level Requirements

We consider the problem of optimizing the terms of a contract between asupplier and a buyer to minimize overall system costs. The supplier seeks tominimize inventory costs in a supply chain which includes assemblyoperations and features stochastic models of available capacity at itsvarious stages. The buyer needs to satisfy demand which is modeled as arather general stochastic process and requires from the supplier theenforcement of certain Quality of Service constraints. We build on ourearlier work for solving the supplier's inventory control problem anddevelop an algorithm that enables supplier and buyer to jointly optimize contract parameters. This can be done in a distributed fashion withoutrevealing to each other their corresponding cost structures.