A cost-effective model for emergency supplies prepositioning and procurement pricing via option contracts

Abstract

Sudden-onset disasters frequently trigger an unexpected surge in demand for essential emergency supplies. Although current approaches prioritize cost-effectiveness and on-time delivery, they often neglect the suffering of disaster victims caused by insufficient emergency supplies. Our research aims to bridge this gap by mitigating the suffering of affected individuals while avoiding excessive costs. Initially, we integrate an option contract (OC) into a single-authority and −supplier framework agreement (FA). The cumulative suffering experienced by the affected population during deprivation periods is quantified under the FA. The supplier aims to maximize profit, while the government seeks to maximize social efficiency, defined as the ratio of the averted suffering to logistics costs. Subsequently, an option-based model for prepositioning and pricing emergency supplies is proposed. The results indicate that more suffering is averted by an OC in comparison to a wholesale contract (WC). Moreover, the option-based model is more cost-effective when the price of emergency purchases falls within a Goldilocks range, thus providing an optimal strike price for executing emergency options that maximizes social efficiency. Finally, we extend the model and observe that varying demand distributions indeed influence humanitarian decision-makers’ optimal decision strategies and seemingly have little effect on the feasibility of incorporating OCs into the prepositioning and procurement of emergency supplies, and that the dual mode of physical and production capacity reserves reduces to the single physical reserve mode when the urgent production cost exceeds a certain threshold. Additionally, the duration required deliver emergency supplies to the beneficiaries is prolonged with the increase in urgent conversion time, which leads to a reduction in social efficiency. Our research proposes a people-oriented, option-based mechanism for prepositioning and procuring emergency supplies to improve social efficiency, with a focus on the alleviation of the affected individuals’ suffering. Various measures are presented for emergency practitioners concerning the prepositioning and pricing of emergency supplies, thereby fostering an enduring government-enterprise cooperative relationship.