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A flexible contract strategy in a supply chain with an inflexible production mode

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Listed:
  • Qunzhi Wang
  • Ou Tang
  • De-bi Tsao

Abstract

This paper presents a flexible supply contract with call options model for an inflexible supply chain, where the supplier only has an opportunity to produce one batch due to a long lead-time limitation. In such systems, there are eventually two decision points. At the beginning of the planning horizon, the supplier offers a wholesale price, and possibly also option purchasing and exercising prices. In addition to a firm initial order, the buyer can purchase options to adjust order quantity later. The supplier then determines the production volume. At the second decision point, with updated forecast, the buyer finalises the order quantity by exercising options. We formulate both the buyer's and the supplier's profit functions. Furthermore, we develop explicit expressions to determine the buyer's optimal decisions, and calculate the supplier's optimal decisions numerically. In numerical study, we illustrate that such a flexible contract strategy improves both the buyer's and supplier's profits.

Suggested Citation

  • Qunzhi Wang & Ou Tang & De-bi Tsao, 2006. "A flexible contract strategy in a supply chain with an inflexible production mode," International Journal of Operational Research, Inderscience Enterprises Ltd, vol. 1(3), pages 228-248.
    • Handle: RePEc:ids:ijores:v:1:y:2006:i:3:p:228-248
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    Citations

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    Cited by:

    1. Wang, Qunzhi & Liu, Xinlin & Liu, Zijian & Xiang, Qin, 2020. "Option-based supply contracts with dynamic information sharing mechanism under the background of smart factory," International Journal of Production Economics, Elsevier, vol. 220(C).
    2. Hu, Fei & Lim, Cheng-Chew & Lu, Zudi, 2014. "Optimal production and procurement decisions in a supply chain with an option contract and partial backordering under uncertainties," Applied Mathematics and Computation, Elsevier, vol. 232(C), pages 1225-1234.
    3. Li, Xiang & Li, Yongjian & Cai, Xiaoqiang, 2011. "On a multi-period supply chain system with supplementary order opportunity," European Journal of Operational Research, Elsevier, vol. 209(3), pages 273-284, March.
    4. Zhuo, Wenyan & Shao, Lusheng & Yang, Honglin, 2018. "Mean–variance analysis of option contracts in a two-echelon supply chain," European Journal of Operational Research, Elsevier, vol. 271(2), pages 535-547.

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