An option mechanism to coordinate a dyadic supply chain bilaterally in a multi-period setting

In today's global environment competition is no longer limited to companies, but has evolved to supply chains seeking to coordinate ordering and production when faced with challenges such as random yield, lead time uncertainty and stochastic demand. This paper presents an algorithm that combines the base stock model and the option mechanism to address that key problem on how to coordinate ordering and production bilaterally in a dyadic supply chain in a multi-period setting. A numerical study that uses fictive data based on real quantitative data from a multinational manufacturer and its preferred supplier are included to illustrate the effects of the algorithm and show how two decentralised companies can each maximise profits (compared to a wholesale contract) while reaching the optimal centralised system level. The manuscript contributes by extending existing literature on supply chain management and finance to coordinate ordering and production bilaterally in a multi-period. Furthermore, the algorithm provides researchers the possibility to study Fisher´s portfolio framework from a dyadic supply chain position.