Coordinating a trust-embedded two-tier supply chain by options with multiple transaction periods

Trust widely works in supply chain practices and deeply affects supply chain decisions. Full trust in transactions and inaccurate demand forecasts are most likely to lead to biased decisions and low supply chain performances. Therefore, we propose a trust updating model to quantify decision-maker’s trust. The model presents the variation of trust over time and is helpful to evaluate decision-maker’s trust level in each transaction. In the model, a coordination mechanism with contract is designed to mitigate each supply chain partner’s ordering risk. Optimal order strategies of both manufactures and retailers in a supply chain under a bidirectional option contract are analysed in this paper. We find the manufacturer’s optimal production quantity is positively affected by penalty price in the contract and its bounds are given by simulation analysis. Our findings in this paper indicate that the proposed coordination mechanism with bidirectional option contract is profitable to all supply chain partners in long-term transactions. Meanwhile, the coordination mechanism helps the supply chain partners to catch up with marketing fluctuations and enhances the supply chain trust and partnerships. Finally, some simulation experiments are employed to obtain more observations.