Abstract
This paper develops a newsboy problem with option contract and partial backorders. In this option contact policy, if the demand exceeds the order quantity, the retailer may have a second replenishment opportunity to order an option quantity from the manufacturer in order to fulfil its backorders. The study derives the optimal solutions for an integrated and decentralised system with a single manufacturer and retailer. The result shows that the integrated system has a greater profit than the decentralised system irrespective of the backordering rate. When the backordering rate is greater than a certain value, the optimal decision is to backorder all the demand from the option quantity. This study provides managerial insights in selecting a revenue-sharing contract to obtain the optimal price and order/option quantity that maximises the supply chain profit.
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