Examining supply contracts under cost and demand uncertainties from supplier’s perspective: a real options approach

Shi, Wenbo; Feng, Tianke

doi:10.1080/00207543.2015.1008110

Cited by 14 publications

(7 citation statements)

References 23 publications

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“…Both short‐term and long‐term contracts are frequently applied in practice. For instance, General Motors and Alcan have signed a 10‐year long‐term contract for aluminum supply (Shi and Feng 2016). On the other hand, Hewlett and Packard spent 15% of their purchase expenses for commodities by using short‐term contracts on spot markets in 2001 (Carbone 2001).…”

Section: Introductionmentioning

confidence: 99%

Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction

Johnsen

Sadrieh

Voigt

2021

Production and Operations Management

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In laboratory experiments, we compare the performance of short‐term and long‐term contracts in a two‐period supplier–buyer dyad with asymmetric cost information. We find that buyers tend to reject offers if the payoff inequality increases from one period to the next. We coin this dynamic form of inequity aversion as “ratcheting aversion.” We show that under short‐term contracting, the buyer's ratcheting aversion limits the supplier's leeway to exploit information revelation in earlier periods because suppliers fear contract rejections in later periods. As a result, the suppliers' empirical benefit of offering long‐term contracts over short‐term contracts is significantly larger than theory predicts. Furthermore, long‐term contracts enable supply chain partners to achieve less volatile supply chain performance than short‐term contracts because the buyers' ratcheting aversion leads to more contract rejections under short‐term contracting. While normative theory predicts that suppliers should include all future informational rents of the buyers in the first‐period offer, thereby creating large payoff differences between periods, we show that it can be behaviorally optimal for the supplier to make offers that lead to more equitable payoffs between periods.

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Section: Introductionmentioning

confidence: 99%

Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction

Johnsen

Sadrieh

Voigt

2021

Production and Operations Management

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“…More importantly, the method is found very effective for analyzing the costs and benefits due to its capacity to cope with uncertainty and flexibility [22]. By valuating this flexibility, the method can assess the value of real assets in an uncertain environment more accurately, and assist managers to evaluate costs and benefits [23,24]. Quite a few scholars have undertaken to introduce the idea of the real options into incentive contracts estimation [13,25].…”

Section: Related Work and Contributionsmentioning

confidence: 99%

Estimating Incentive Contracts for Solar PV-based Microgrid Production Considering Cost-Benefit Uncertainty

Bi¹,

Li²,

Lyu³

2022

Pol. J. Environ. Stud.

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Traditional fossil fuel power plants not only pollute the environment but also aggravate climate change. It has become a consensus to develop green, low-carbon and renewable energy. Countries all over the world have realized the urgency of energy transformation. According to the roadmap made by the International Renewable Energy Agency [1], to achieve the climate targets outlined in the Paris Agreement, decarbonization in the power sector will require renewable energy generation to account for 85%

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“…Nosoohi and Nookabadi (2016) provided a numerical analysis that gives insights on the value of options contract for different parameter settings. Shi and Feng (2016) examined the usefulness and risks of supply contracts from a supplier's perspective and used real options to investigate the supplier's acceptance towards a supply contract with variable cost and supply-demand uncertainties.…”

Section: Options Contracts In the Supply Chainmentioning

confidence: 99%

Improving the coordination in the humanitarian supply chain: exploring the role of options contract

et al. 2020

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The uncertainty associated with the location, severity and timing of disaster makes it difficult for the humanitarian organization (HO) to predict demand for the aid material and thereby making the relief material procurement even more challenging. This research explores whether options contract can be used as a mechanism to aid the HO in making procurement of relief material less challenging by addressing two main issues: inventory risk for buyers and over-production risk for suppliers. Furthermore, a contracting mechanism is designed to achieve coordination between the HO and aid material suppliers in the humanitarian supply chain through optimal pricing. The options contract is modelled as a stylized version of the newsvendor problem that allows the HO to adjust their order quantity after placing the initial order at the beginning of the planning horizon. This flexibility helps to mitigate the risk of both overstocking and understocking for the HO as well as the risk of overproduction for the supplier. Our results indicate that the optimal values for decision parameters are not “point estimates” but a range of prices, which can facilitate negotiation between the two parties for appropriate selection of contract parameters under an options contract. The results imply that options contract can aid in the decentralized approach of fixing the prices between the HO and the supplier, which in turn would help in achieving systemic coordination.

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Examining supply contracts under cost and demand uncertainties from supplier’s perspective: a real options approach

Cited by 14 publications

References 23 publications

Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction

Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction

Estimating Incentive Contracts for Solar PV-based Microgrid Production Considering Cost-Benefit Uncertainty

Improving the coordination in the humanitarian supply chain: exploring the role of options contract

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