Option contracts have been increasingly employed by supply chain firms as a popular strategy to hedge against the risk of unanticipated demand. This paper examines the impact of bidirectional option contracts on a two-echelon supply chain consisting of a supplier and a retailer taking into consideration of a service requirement. We characterize the optimal solutions for the retailer and the supplier with and without bidirectional option contracts in the presence of a service requirement. By benchmarking to the model without bidirectional option, we explore the effect of bidirectional option contracts on the supply chain. Our study shows that the service level with bidirectional option contracts is equivalent to (higher than) that without them when the service requirement is (not) binding. In addition, bidirectional option contracts are indeed beneficial to both the retailer and the supplier. Furthermore, by investigating the effect of the service level on the supply chain, we find that the maximum expected profit of the retailer is non-increasing in the service requirement while that of the supplier is non-decreasing in the service requirement, either with or without bidirectional option contracts. Finally, a distribution-free coordination condition is proposed to achieve the Pareto improvement in the presence of bidirectional option contracts and a service requirement.
This paper considers a supply chain consisting of a supplier who manufactures one type of perishable products characterized by a long lead time and a retailer who purchases the products from the supplier and sells them to end consumers. In order to hedge against the risks of price and demand caused by inflation, portfolio contracts with put options, namely, a combination of wholesale price contracts and put option contracts, are adopted by the retailer to obtain the products from the supplier. We characterize the optimal ordering and production policies for the retailer and the supplier in the presence of put option contracts under inflation. By comparing with the case without put option contracts, we discuss the effect of put option contracts on the supply chain and prove that the usage of put option contracts benefits these two members under inflation. Through several numerical examples, we illustrate the effect of inflation on the supply chain with and without put option contracts. On this basis, we design a feasible supply chain coordination strategy based on put option contracts under inflation.
There exist obvious changes in price and demand during the inflationary period, both of which are regarded as the key factors leading to supply chain uncertainty. In this paper, we focus our discussion on price increase and demand contraction caused by inflation, integrate the effect of inflation and option contracts within the model framework, and analyze how to use option contracts to achieve supply chain coordination under inflation scenarios. We consider a one-period two-stage supply chain consisting of one supplier and one retailer and explore the effect of inflation on the optimal ordering and production decisions under three different types of contracts: wholesale price contracts, option contracts, and portfolio contracts. Moreover, we explore the impact of option contracts on the supply chain through using wholesale price contracts model as the benchmark. We find that the retailer prefers adopting portfolio contracts, but the supplier prefers providing option contracts under inflation scenarios. Ultimately, option contracts will be implemented owing to the supplier’s market dominant position. In addition, we discuss the supply chain bilateral coordination mechanism with option contracts from the perspectives of two members and derive that option contracts can coordinate the supply chain and achieve Pareto improvement under inflation scenarios.
As far as the price increase and the demand contraction caused by inflation are concerned, we establish a Stackelberg game model that incorporates bidirectional option contracts and the effect of inflation and derive the optimal ordering and production policies on a one-period two-stage supply chain composed of one supplier and one retailer. Through using the model of wholesale price contracts as the benchmark, we find that the introduction of bidirectional option contracts can benefit both the supplier and the retailer under inflation scenarios. Based on the conclusions drawn above, we design the bilateral coordination mechanism from the different perspective of two members involved and discuss how bidirectional option contracts should be set to achieve channel coordination under inflation scenarios. Through the sensitivity analysis, we illustrate the effect of inflation on the optimal decision variables and the optimal expected profits of the two parties with bidirectional option contracts.
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