Risk Allocation Model of Supply Chain Option Contract under  Demand Uncertainty

Supply chain option contract is one of the important ways to respond to demand uncertainty. However, such a contract brings new risks into a supply chain. While dealing with the problem of risk sharing in supply chain option contract, decision makers are advised to determine option price and share risks by bargaining power. In this paper, the risk sharing by using option contract is studied for a supply chain composed of one manufacturer and one retailer. With the effect of bargaining power on order quantity, production scheduling, and profit being considered, a risk sharing model is proposed. Based on the model, analysis shows that, by option contract, it can increase the expected profit for both the manufacturer and retailer. When the manufacturers bargaining power is increased, the retailers order quantity increases, but option quantity decreases. When the manufacturers bargaining power is decreased, the total expected profit in supply chain is reduced. Simulation experiments verify the obtained results. Based on the results, suggestions are made for decision making of option price.