Abstract: Considering the buyer's giving an extra subsidy to the supplier,a profit model including a producer and a buyer is generated.The evidence is provided that there exists a reasonable subsidy to make the supplier and the buyer's profits increased in short-term and long-term.Moreover,it could decrease the purchase price and increase the annual purchase quantity.Finally,an example and sensitivity analysis was given to illustrate the models.

Key words: supply chain, cost subsidy factor, VMI