Pre-purchasing with option contract and coordination in a relief supply chain

Abstract

In humanitarian operations management, a supply and purchasing issue has long plagued practitioners and scholars. A strategy that involves the purchase of relief supplies immediately after a disaster (instant purchasing) can reduce operational cost. However, purchasing price and possible supply scarcity are high because of the time urgency. Alternatively, pre-purchasing relief supplies is a strategy that is characterized by a low purchase price. However, this approach entails a loss associated with the uncertainty of demand and an increase in inventory cost. To resolve this problem, we introduce a supply chain methodology into humanitarian operations management by considering the system as a relief supply chain. We determine that pre-purchasing relief supplies from a supplier with an option contract is superior to both pre-purchasing with a buyback contract and instant-purchasing with a return policy. An option contract enables the coordination of a relief supply chain and the achievement of Pareto improvement. Additionally, with consideration of the risk level and preference, profit distribution with an option contract becomes acceptable for both the supplier and the purchaser.