Supply contract with bidirectional options: The buyer's perspective

Abstract

This paper develops a single-period two-stage supply contract with bidirectional options by which the buyer can adjust the initial order both upward and downward. At the beginning of the planning horizon, the buyer places an initial order and purchases options. After updating the demand forecast, the buyer exercises options to adjust the initial order. We analyze the contract from the buyer's perspective and formulate the buyer's optimal policies. In particular, we obtain closed-form formulae to describe the buyer's optimal behavior when the demand is uniformly distributed. We also analyze how the parameters affect the buyer's behavior and prove numerically that using bidirectional options can improve the buyer's profit.