Option Contracts in Fresh Produce Supply Chain with Freshness-Keeping Effort

Abstract

This study investigates a supply chain of fresh produce with consideration of option contracts and where stochastic market demand depends on freshness-keeping effort. Firstly, we investigate a benchmark scenario of an integrated supply chain with freshness effort and consideration of decreases in both the quality and quantity of produce while in the supply chain. Secondly, we introduce call, put, and bidirectional option contracts to mitigate risks of the retailer. A call option contract can reduce the underage risk, while a put option contract can reduce the overage risk, and a bidirectional option contract can reduce bilateral risks. We derive the optimal ordering decisions and freshness-keeping effort for a retailer in a supply chain of fresh produce with option contracts, and the conditions for achieving coordination of the supply chain. We find that the bidirectional option results in the highest option price and lowest option order quantity, while the call option results in the lowest initial order quantity and the put option results in the highest initial order quantity. Finally, numerical examples are given to demonstrate the impacts of various parameters on optimal decision-making. This paper provides managerial insights for reducing risk in fresh produce supply chains.