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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ijpe.2005.03.012 Byline: Hongsheng Chu, Jingchun Wang, Yihui Jin, Hansheng Suo Abstract: We investigate a two-component assembly system facing stationary stochastic demand with constant component replenishment lead times. Holding cost are charged for each component inventory, which are managed by component suppliers; final product demand is backordered when cannot be fulfilled in time and a penalty cost is charged. We assume the long lead-time component supplier takes normal base-stock policy while the short lead-time component supplier takes a modified base-stock policy. Static game and Stackelberg games are considered. Equilibria are analyzed and the cost in equilibria are compared with the system optimal solution, difference shows the deterioration of system performance caused by decentralized inventory control. We try to design a mechanism to coordinate the decentralized system, that is to make decentralized system perform as well as system optimal solution though the decisions separated. We show that a liner transfer based on the backorder between the component suppliers qualifies this task. Author Affiliation: Department of Automation, Tsinghua University, 100084, China Article History: Received 23 March 2004; Accepted 24 March 2005 Article Note: (footnote) [star] Supported by the National Natural Science Foundation of China (No. 60174046).