Coordination of supply chains with bidirectional option contracts. (English) Zbl 1317.90062

Summary: In this paper we develop a supply contract for a two-echelon manufacturer-retailer supply chain with a bidirectional option, which may be exercised as either a call option or a put option. Under the bidirectional option contract, we derive closed-form expressions for the retailer’s optimal order strategies, including the initial order strategy and the option purchasing strategy, with a general demand distribution. We also analytically examine the feedback effects of the bidirectional option on the retailer’s initial order strategy. In addition, taking a chain-wide perspective, we explore how the bidirectional option contract should be set to attain supply chain coordination.


90B06 Transportation, logistics and supply chain management
Full Text: DOI


[1] Barnes-Schuster, D.; Bassok, Y.; Anupindi, R., Coordination and flexibility in supply contracts with options, Manufacturing and Service Operations Management, 4, 3, 171-207 (2002)
[2] Bernstein, F.; Federgruen, A., Decentralized supply chains with competing retailers under demand uncertainty, Management Science, 51, 1, 18-29 (2005) · Zbl 1232.90171
[3] Brown, A. O.; Lee, H. L., The impact of demand signal quality on optimal decisions in supply contracts, (Shanthikumar, J. G.; Yao, D. D.; Zijim, W. H.M., Stochastic Modeling and Optimization of Manufacturing Systems and Supply Chains (2003), Kluwer: Kluwer Boston, MA), 299-328 · Zbl 1161.91425
[4] Burnetas, A.; Ritchken, P., Option pricing with downward-sloping demand curves: the case of supply chain options, Management Science, 51, 4, 566-580 (2005) · Zbl 1145.91341
[5] Buzacott, J.; Yan, H.; Zhang, H., Risk analysis of commitment-option contracts with forecast updates, IIE Transactions, 43, 6, 415-431 (2011)
[6] Cachon, G., Supply chain coordination with contracts, (Graves, S.; Kok, T., Handbooks in Operations Research and Management Science: Supply Chain Management (2003), North Holland: North Holland Amsterdam), (Chapter 6)
[7] Cachon, G.; Lariviere, M. A., Contracting to assure supply: how to share demand forecasts in a supply chain, Management Science, 47, 5, 629-646 (2001) · Zbl 1232.91376
[8] Chen, F.; Parlar, M., Value of a put option to the risk-averse newsvendor, IIE Transactions, 39, 5, 481-500 (2007)
[9] Donohue, K. L., Efficient supply contracts for fashion goods with forecast updating and two production modes, Management Science, 46, 11, 1397-1411 (2000) · Zbl 1232.90177
[10] Edlin, A. S.; Hermalin, B. E., Contract renegotiation and options in agency problems, Journal of Law, Economics, & Organization, 16, 2, 395-423 (2000)
[11] Emmons, H.; Gilbert, S. M., Note: the role of returns policies in pricing and inventory decisions for catalogue goods, Management Science, 44, 2, 276-283 (1998) · Zbl 0989.90043
[12] Eppen, G. D.; Iyer, A. V., Backup agreements in fashion buying - the value of upstream flexibility, Management Science, 43, 11, 1469-1487 (1997) · Zbl 0902.90046
[13] Erkoc, M.; Wu, S., Managing high-tech capacity expansion via reservation contracts, Production and Operations Management, 14, 2, 232-251 (2005)
[14] GomezPadilla, A.; Mishina, T., Supply contract with options, International Journal of Production Economics, 122, 312-318 (2009)
[15] Granot, D.; Yin, S., On the effectiveness of returns policies in the price-dependent newsvendor models, Naval Research Logistics, 52, 8, 765-779 (2005) · Zbl 1278.90021
[16] Hazra, J.; Mahadevan, B., A procurement model using capacity reservation, European Journal of Operational Research, 193, 1, 303-316 (2009) · Zbl 1152.90356
[18] Hu, B. Y.; Wang, X. Y.; Peng, Q. Y., Comparison analysis on flexible supply contracts between unilateral options and bidirectional options, Chinese Journal of Management Science, 15, 6, 92-97 (2007), (in Chinese)
[19] Inderfurth, K.; Kelle, P., Capacity reservation under spot market price uncertainty, International Journal of Production Economics, 133, 1, 272-279 (2011)
[20] Jin, M.; Wu, S., Capacity reservation contracts for high-tech industry, European Journal of Operational Research, 176, 3, 1659-1677 (2007) · Zbl 1109.90315
[21] Lariviere, M. A., Supply chain contracting and coordination with stochastic demand, (Tayur, S.; Ganeshan, R.; Magazine, M., Handbooks in Operations Research and Management Science: Quantitative Models for Supply Chain Management (1999), Kluwer Academic Publishers: Kluwer Academic Publishers Boston), (Chapter 8) · Zbl 1052.90511
[22] Milner, J. M.; Rosenblatt, M. J., Flexible supply contracts for short life-cycle goods: the buyer’s perspective, Naval Research Logistics, 49, 25-45 (2002) · Zbl 0994.90086
[23] Moinzadeh, K.; Nahmias, S., Adjustment strategies for a fixed delivery contract, Operations Research, 48, 3, 408-423 (2000)
[24] Norden, L.; Velde, S., Multi-product lot-sizing with a transportation capacity reservation contract, European Journal of Operational Research, 165, 1, 127-138 (2005) · Zbl 1112.90329
[25] Padmanabhan, V.; Png, I. P.L., Manufacturer’s returns policies and retail competition, Marketing Science, 16, 1, 81-94 (1997)
[26] Padmanabhan, V.; Png, I. P.L., Reply to “Do returns policies intensify competition?”, Marketing Science, 23, 4, 614-618 (2004)
[27] Pasternack, B., Optimal pricing and returns policies for perishable commodities, Marketing Science, 4, 2, 166-176 (1985)
[28] Ritchken, P. H.; Tapiero, C. S., Contingent claims contracting for purchasing decisions in inventory management, Operations Research, 34, 6, 864-870 (1986) · Zbl 0617.90016
[29] Serel, D., Capacity reservation under supply uncertainty, Computers & Operations Research, 34, 4, 1192-1220 (2007) · Zbl 1102.90320
[30] Serel, D.; Dada, M.; Moskowitz, H., Sourcing decisions with capacity reservation contracts, European Journal of Operational Research, 131, 3, 635-648 (2001) · Zbl 0994.90081
[31] Song, Y. Y.; Ray, S.; Li, S. L., Structural properties of buyback contracts for price-setting newsvendors, Manufacturing & Service Operations Management, 10, 1, 1-18 (2008)
[32] Spinler, S.; Huchzermeier, A., The valuation of options on capacity with cost and demand uncertainty, European Journal of Operational Research, 171, 3, 915-934 (2006) · Zbl 1116.90041
[33] Spinler, S.; Huchzermeier, A.; Kleindorfer, P. R., Risk hedging via options contracts for physical delivery, OR Spectrum, 25, 3, 379-395 (2003) · Zbl 1043.91036
[34] Wang, H., Do returns policies intensify retail competition?, Marketing Science, 23, 4, 611-613 (2004)
[35] Wang, X. L.; Liu, L. W., Coordination in a retailer-led supply chain through option contract, International Journal of Production Economics, 110, 115-127 (2007)
[36] Wang, Q. Z.; Tsao, D. B., Supply contract with bidirectional options: the buyer’s perspective, International Journal of Production Economics, 101, 30-52 (2006)
[37] Wu, D. J.; Kleindorfer, P. R., Competitive options, supply contracting, and electronic markets, Management Science, 51, 3, 452-466 (2005)
[38] Wu, D. J.; Kleindorfer, P. R.; Zhang, J. E., Optimal bidding and contracting strategies for capital-intensive goods, European Journal of Operational Research, 137, 657-676 (2002) · Zbl 1131.91324
[39] Wu, D. J.; Kleindorfer, P. R.; Sun, Y., Optimal capacity expansion in the presence of capacity options, Decision Support Systems, 40, 3-4, 553-561 (2005)
[40] Yang, J.; Qi, X., On the design of coordinating contracts, International Journal of Production Economics, 122, 2, 581-594 (2009)
[41] Zhao, Y.; Wang, S.; Cheng, T. C.E.; Yang, X.; Huang, Z., Coordination of supply chains by option contracts: a cooperative game theory approach, European Journal of Operational Research, 207, 2, 668-675 (2010) · Zbl 1205.90061
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.