Impacts of put option contract and supply chain structure in a multi-period supply chain with uncertain demand

Abstract

This paper builds the multi-period optimization models that incorporate put option contract and two supply chain structures to determine the production decision for a supplier and the ordering decision for a manufacturer in a two-stage supply chain. This paper applies the method of dynamic programming to derive the structures of optimal policies and provides an approximate algorithm to evaluate the myopic policies. This paper also conducts numerical examples to illustrate the impacts of put option contract, supply chain structure and demand risk on the members’ decisions and total profits as well as the channel’s total profit. The results indicate that put option contract can motivate to increase the channel’s service level and reduce the manufacturer’s inventory risk under two supply chain structures, when compared to the case without put option contract. In the manufacturer-led structure, the channel always benefits from put option contract, the supplier benefits from put option contract with a high option price and a low exercise price, while the manufacturer benefits from put option contract with a low option price and a high exercise price. In the supplier-led structure, the channel and the manufacturer always benefit from put option contract, while the supplier benefits from put option contract with a high option price and a low exercise price. With put option contract, the supplier is more profitable in the manufacturer-led structure than in the supplier-led structure, while the manufacturer and the channel are more profitable in the supplier-led structure than in the manufacturer-led structure. Without and with put option contract, the optimal total profits of two members and the channel will first decrease and then increase in the demand risk. Finally, this paper identifies the explicit conditions under which the multi-period supply chain can be coordinatedviaput option contract under two supply chain structures. With a coordinating contract, the supplier and the manufacturer are better off compared to the case without put option contract.