Managing Emergency Procurement Using Option Contract under Supply Disruption and Demand Uncertainty

Abstract

Effective and flexible procurement and production strategies are capable of alleviating and mitigating supply disruption and demand risk. Considering the price fluctuation caused by environmental change, we investigate the optimal procurement and production strategies under supply disruption and demand uncertainty based on option contract in a two‐stage supply chain consisting of a retailer who has two procurement opportunities and a supplier who has the emergency production chance. We explore the value of option contract by comparing it with the optimal decision making under no option contract. The result shows that option ordering and emergency procurement can coordinate the optimal strategies under uncertain environment, improving the economic performance of whole supply chain. When the disruption probability is high or the price of emergency procurement is lower, the higher option price can stimulate the supplier to produce more products to satisfy the retailer’s emergency order at a low price, which is beneficial to both, and the value of option ordering is greater. Otherwise, the emergency procurement is worth more for the core enterprise. The moderate exercise price is conducive to the long‐term cooperation of the supplier and the retailer.