Supply Chain Coordination Investigation using a Bidirectional Option Contract: The Case of Unrealized Demand

Abstract

This research considers a simple two-stage supply chain comprised of a distributor and a supplier. A bidirectional option supply contract was applied to deal with the problems of volatile demand, a long lead time, and a short selling season for a single type of product. The main research objective was to investigate whether this supply contract helps coordinate the supply chain in the case where demand is unrealized at the beginning of the selling season. It was found that, in the case of unrealized demand, this supply contract could not help coordinate the supply chain. On the contrary, comparing with the case demand was assumed as a realization at the beginning of the selling season (as in the existing literature), the supply contract helped coordinate supply chain.