IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v257y2017i1d10.1007_s10479-016-2136-1.html
   My bibliography  Save this article

Designing structured supply contracts under demand and price uncertainty in an open supply chain

Author

Listed:
  • Zhanping Cheng

    (BASF SE, Global Controlling)

  • Xiaodong Yang

    (Beijing Foreign Studies University)

  • Andy A. Tsay

    (Santa Clara University)

Abstract

This paper develops an integrated model for analyzing and designing structured supply contracts from the perspectives of the buyer, the supplier, and the entire supply chain in an open supply chain. We first present a flexible framework that encapsulates a wide range of contracting types that have been studied previously. We then introduce the concept of relative contract value vis-a-vis a reference alternative, which facilitates addressing explicitly both the demand uncertainty and the price uncertainty within which real supply relationships operate. To guide practitioners in designing optimal supply contracts, we derive closed-form expressions for optimal contract structure, quantity commitment and flexibility, pricing, and sharing policy as well as the conditions to maximize total supply chain profitability associated with a contract. Our research demonstrates that structured contracts consisting of several fixed and/or flexible components are capable of maximizing total supply chain profit and allocating profit between contracting parties arbitrarily.

Suggested Citation

  • Zhanping Cheng & Xiaodong Yang & Andy A. Tsay, 2017. "Designing structured supply contracts under demand and price uncertainty in an open supply chain," Annals of Operations Research, Springer, vol. 257(1), pages 519-536, October.
    • Handle: RePEc:spr:annopr:v:257:y:2017:i:1:d:10.1007_s10479-016-2136-1
    DOI: 10.1007/s10479-016-2136-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10479-016-2136-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10479-016-2136-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chung-Lun Li & Panos Kouvelis, 1999. "Flexible and Risk-Sharing Supply Contracts Under Price Uncertainty," Management Science, INFORMS, vol. 45(10), pages 1378-1398, October.
    2. Li, Xiang & Li, Yongjian & Cai, Xiaoqiang, 2013. "Double marginalization and coordination in the supply chain with uncertain supply," European Journal of Operational Research, Elsevier, vol. 226(2), pages 228-236.
    3. Bose, Indranil & Anand, Paul, 2007. "On returns policies with exogenous price," European Journal of Operational Research, Elsevier, vol. 178(3), pages 782-788, May.
    4. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    5. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
    6. Pietro Giovanni & Maria Roselli, 2012. "Overcoming the drawbacks of a revenue-sharing contract through a support program," Annals of Operations Research, Springer, vol. 196(1), pages 201-222, July.
    7. Paul R. Kleindorfer & D. J. Wu, 2003. "Integrating Long- and Short-Term Contracting via Business-to-Business Exchanges for Capital-Intensive Industries," Management Science, INFORMS, vol. 49(11), pages 1597-1615, November.
    8. Wu, D. J. & Kleindorfer, P. R. & Zhang, Jin E., 2002. "Optimal bidding and contracting strategies for capital-intensive goods," European Journal of Operational Research, Elsevier, vol. 137(3), pages 657-676, March.
    9. Gary D. Eppen & Ananth. V. Iyer, 1997. "Backup Agreements in Fashion Buying---The Value of Upstream Flexibility," Management Science, INFORMS, vol. 43(11), pages 1469-1484, November.
    10. Natalia Golovachkina, 2003. "Supplier-Manufacturer Relationships Under Forced Compliance Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 5(1), pages 67-69.
    11. Jewel S. Bonser & S. David Wu, 2001. "Procurement Planning to Maintain Both Short-Term Adaptiveness and Long-Term Perspective," Management Science, INFORMS, vol. 47(6), pages 769-786, June.
    12. Feng Cheng & Markus Ettl & Grace Y. Lin & Maike Tonner & David D. Yao, 2011. "Designing Flexible Supply Chain Contracts with Options," International Series in Operations Research & Management Science, in: Karl G Kempf & Pınar Keskinocak & Reha Uzsoy (ed.), Planning Production and Inventories in the Extended Enterprise, chapter 0, pages 207-229, Springer.
    13. D. J. Wu & Paul R. Kleindorfer, 2005. "Competitive Options, Supply Contracting, and Electronic Markets," Management Science, INFORMS, vol. 51(3), pages 452-466, March.
    14. Fotopoulos, S.B. & Hu, X. & Munson, C.L., 2008. "Flexible supply contracts under price uncertainty," European Journal of Operational Research, Elsevier, vol. 191(1), pages 253-263, November.
    15. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    16. Li, Shanling & Murat, Alper & Huang, Wanzhen, 2009. "Selection of contract suppliers under price and demand uncertainty in a dynamic market," European Journal of Operational Research, Elsevier, vol. 198(3), pages 830-847, November.
    17. Brian Tomlin, 2003. "Capacity Investments in Supply Chains: Sharing the Gain Rather Than Sharing the Pain," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 317-333, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kelei Xue & Yongjian Li & Xueping Zhen & Wen Wang, 2020. "Managing the supply disruption risk: option contract or order commitment contract?," Annals of Operations Research, Springer, vol. 291(1), pages 985-1026, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pamela Pen-Erh Pei & David Simchi-Levi & Tunay I. Tunca, 2011. "Sourcing Flexibility, Spot Trading, and Procurement Contract Structure," Operations Research, INFORMS, vol. 59(3), pages 578-601, June.
    2. Biswas, Indranil & Avittathur, Balram, 2019. "Channel coordination using options contract under simultaneous price and inventory competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 123(C), pages 45-60.
    3. Paul R. Kleindorfer & D. J. Wu, 2003. "Integrating Long- and Short-Term Contracting via Business-to-Business Exchanges for Capital-Intensive Industries," Management Science, INFORMS, vol. 49(11), pages 1597-1615, November.
    4. Wu, Xiaole & Kouvelis, Panos & Matsuo, Hirofumi & Sano, Hiroki, 2014. "Horizontal coordinating contracts in the semiconductor industry," European Journal of Operational Research, Elsevier, vol. 237(3), pages 887-897.
    5. Zhao, Yingxue & Ma, Lijun & Xie, Gang & Cheng, T.C.E., 2013. "Coordination of supply chains with bidirectional option contracts," European Journal of Operational Research, Elsevier, vol. 229(2), pages 375-381.
    6. Xiong, Huachun & Chen, Bintong & Xie, Jinxing, 2011. "A composite contract based on buy back and quantity flexibility contracts," European Journal of Operational Research, Elsevier, vol. 210(3), pages 559-567, May.
    7. Victor Martínez-de-Albéniz & David Simchi-Levi, 2009. "Competition in the Supply Option Market," Operations Research, INFORMS, vol. 57(5), pages 1082-1097, October.
    8. Martinez de Albeniz, Victor & Simchi-Levi, David, 2007. "Competition in the supply option market," IESE Research Papers D/718, IESE Business School.
    9. Jörnsten, Kurt & Lise Nonås, Sigrid & Sandal, Leif & Ubøe, Jan, 2013. "Mixed contracts for the newsvendor problem with real options and discrete demand," Omega, Elsevier, vol. 41(5), pages 809-819.
    10. Zhao, Yingxue & Wang, Shouyang & Cheng, T.C.E. & Yang, Xiaoqi & Huang, Zhimin, 2010. "Coordination of supply chains by option contracts: A cooperative game theory approach," European Journal of Operational Research, Elsevier, vol. 207(2), pages 668-675, December.
    11. D. J. Wu & Paul R. Kleindorfer, 2005. "Competitive Options, Supply Contracting, and Electronic Markets," Management Science, INFORMS, vol. 51(3), pages 452-466, March.
    12. Shen, Houcai & Pang, Zhan & Cheng, T.C.E., 2011. "The component procurement problem for the loss-averse manufacturer with spot purchase," International Journal of Production Economics, Elsevier, vol. 132(1), pages 146-153, July.
    13. Xing, Wei & Liu, Liming & Wang, Shouyang, 2014. "More than a second channel? Supply chain strategies in B2B spot markets," European Journal of Operational Research, Elsevier, vol. 239(3), pages 699-710.
    14. Zhang, Dengfeng & de Matta, Renato & Lowe, Timothy J., 2010. "Channel coordination in a consignment contract," European Journal of Operational Research, Elsevier, vol. 207(2), pages 897-905, December.
    15. 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.
    16. Senlin Zhao & Qinghua Zhu, 2017. "Remanufacturing supply chain coordination under the stochastic remanufacturability rate and the random demand," Annals of Operations Research, Springer, vol. 257(1), pages 661-695, October.
    17. Ding, Ding & Chen, Jian, 2008. "Coordinating a three level supply chain with flexible return policies," Omega, Elsevier, vol. 36(5), pages 865-876, October.
    18. Zhao, Yingxue & Choi, Tsan-Ming & Cheng, T.C.E. & Wang, Shouyang, 2018. "Supply option contracts with spot market and demand information updating," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1062-1071.
    19. Xu, Jinpeng & Feng, Gengzhong & Jiang, Wei & Wang, Shouyang, 2015. "Optimal procurement of long-term contracts in the presence of imperfect spot market," Omega, Elsevier, vol. 52(C), pages 42-52.
    20. Edward Anderson & Bo Chen & Lusheng Shao, 2017. "Supplier Competition with Option Contracts for Discrete Blocks of Capacity," Operations Research, INFORMS, vol. 65(4), pages 952-967, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:annopr:v:257:y:2017:i:1:d:10.1007_s10479-016-2136-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.