A relief supplies purchasing model via option contracts

Abstract

The demand for relief supplies after sudden disasters strike is growing at an explosive rate. Because of high uncertainty and time urgency, governments usually stockpile a certain amount of relief supplies in advance of potential disasters. Hence governments face inventory risk and stock-out risk in the relief supply management. The stored relief supplies by governments are wasted if no disaster happens. If the quantity of stored relief supplies is not sufficient, stock-out risk will occur. In reality, governments may purchase relief supplies from multiple suppliers, rather than from a supplier. However, few studies have been undertaken with respect to the decision of what quantity of relief supplies should be stockpiled by governments, and how much inventory to pre-position at each supplier. To solve the problem, we introduce option contracts into relief supply management by considering this system as a relief supply chain with one government and multiple suppliers. A relief supplies purchasing (RSP) model via option contracts is established. The government’s optimal order quantity of relief supplies and each supplier’s pre-positioning quantity of relief supplies are derived. We uncover the condition that the relief supply chain coordination is achieved. Under channel coordination, the RSP model can improve the total quantity of relief supplies stockpiled for sudden disasters, and reduce the government’s inventory risk when compared to the government single pre-positioning model. Meanwhile, we give the condition that the government and all suppliers achieve a multi-win situation. Finally, we broaden our model and attain a common interval in which both supplier 1 and supplier 2 are willing to engage. The research findings provide some managerial insights for government’s purchasing strategies.