Managing Production and Procurement by Option Contracts in a Supply Chain with Stochastic Yield and Random Instant Price

Abstract

Abstract:

The decision-making problems of production and procurement with bi-directional option contracts in a decentralized supply chain consisting of one manufacturer and one retailer are studied. The retailer outsources products from the manufacturer and resells them to the end market with uncertain demand, and the manufacturers production yield is stochastic. The retailer can order products through bi-directional option contracts from the manufacturer, or implement instant order after the demand is realized, which is subject to random pricing. The manufacturers optimal production plan and the retailers optimal ordering strategy are studied; and the effects of changes in the price parameters of bidirectional option contracts, demand uncertainty, production yield volatility and instant price variability on the optimal operational strategies and performance of both participants are also analyzed.

Key words: random yield, bi-directional option contract, supply chain

Li Ji-cai1,2, Li Chang-wen3,Guo Jin-sen3. Managing Production and Procurement by Option Contracts in a Supply Chain with Stochastic Yield and Random Instant Price[J]. Industrial Engineering Journal .

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