Flexible Supply Contracts via Options
نویسندگان
چکیده
We develop an option model to quantify and price a flexible supply contract, by which the buyer (a manufacturer), in addition to a committed order quantity, can purchase option contracts and decide whether or not to exercise them after demand is realized. We consider both call and put options, which generalize several widely practiced contracting schemes such as capacity reservation and buy-back/return policies. We focus on deriving (a) the optimal order decision of the buyer, in terms of both the committed order quantity and the number of option contracts; and (b) the optimal pricing decision of the seller (which supplies raw materials or components to the manufacturer), in terms of both the option price and the exercise price. We show that the option contracts shift part of the buyer’s risk due to demand uncertainty to the supplier; and the supplier, in turn, is compensated by the additional revenue obtained from the options. We also show that a better alternative to the two parties’ individual optimization is for them to negotiate a mechanism to share the profit improvement over the no-flexibility contract. Indeed, this profit sharing may achieve channel coordination. ∗Research undertaken while an academic visitor at IBM T.J. Watson Research Center.
منابع مشابه
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