Flexible and risk-sharing supply contracts under price uncertainty. (English) Zbl 1231.90047

Li, Chung-Lun; Kouvelis, Panos

Manage. Sci. 45, No. 10, 1378-1398 (1999).

Summary: We study supply contracts for deterministic demand but in an environment of uncertain prices. We develop valuation methodologies for different types of supply contracts. A “time-inflexible contract” requires the firm to specify not only how many units it will purchase, but also the timing of the purchase. A “time-flexible contract” allows the firm to specify the purchase amount over a given period of time without specifying the exact time of purchase. Other than time flexibility, the suppliers may offer “quantity flexibility” to the firm as well, i.e., purchase quantities could be within a prespecified quantity window. Finally, “risk-sharing” features can be incorporated in the contract in terms of the purchase price that the firm eventually pays to a supplier. Within a prespecified price window the firm pays the realized price, but outside of it the firm shares, in an agreed way, added costs or benefits.

MSC:

90B05	Inventory, storage, reservoirs
90B06	Transportation, logistics and supply chain management

Keywords:

supply contracts; global operations; flexibility; binomial lattice