Abstract: Considering supply risks and production cost uncertainty, the optimal decisions of a manufacturer and a supplier when either of them can initiate effort endogenously to enhance the supply reliability and reduce the production cost with certain probabilities is studied in this paper. Two dynamic programming models-the manufacture-initiated effort model and the supplier-initiated effort model-are designed separately. For each model, the impacts of the success probabilities on the optimal purchasing quantity are analyzed, on the optimal effort level, on the supplier's and manufacturer's expected profits, and on the expected total supply chain profit. By comparing the two models, It's found that whether the manufacturer's optimal effort is greater than that of the supplier depends on the revenue-sharing parameter. The optimal purchasing quantity in manufacturer-initiated effort model is not less than that in supplier-initiated effort model. And the expected profit of manufacturer is higher in the manufacturer-initiated effort model, but the expected profits of the supplier and the supply chain could be higher in the supplier-initiated effort model.

Key words: supply risk, supplier-initiated effort, manufacturer-initiated effort, dynamic decision