Abstract: The supply chain considered in this paper is composed of a supplier and a retailer. In such a supply chain, the unit production cost depends on scale economy effect and varies as the demands change. Study is conducted in this paper on  the disturbance management issue under centralized mode and the coordination mechanism  under decentralized mode. It is found that when the disturbance is small, a static production plan can be robust to the disturbance. However, when the disturbance is large, to coordinate the supply chain, the retailer should dynamically adjust the price and order quantity by changing the discount policies. A numerical example is used to verify the results obtained in this paper.

Key words: scale economy effects, demand disturbance, supply chain coordination