Modeling of Capacity Reservation and Supplier Selection Based on Option Contract

Authors

  • Iman Nosoohi Department of industrial engineering, Isfahan University of Technology (IUT),
  • Naser Mollaverdi Department of industrial engineering, Isfahan University of Technology (IUT)
Abstract:

    Capacity Reservation,   Option Contract,   Supplier Selection A key issue for manufacturing firms is planning for outsourced components. In this research, we have considered a manufacturer in a Make-to-Order production environment who has to outsource a special component from a set of suppliers. One selling season is considered and the manufacturer faces uncertain demand during the selling season. A good strategy for the manufacturer to balance both holding and lost sale costs is to initiate capacity reservation contracts with his suppliers. Thus, unlike the previous researches we have presented a mathematical model based on option mechanism that will help the manufacturer to select appropriate suppliers and order allocation, simultaneously. The considered option mechanism has a two part contract fee structure (option price and exercise price) and it is at the foundation of practical contracts used by different industries. A numerical example is used to illustrate the model and to investigate how option mechanism improves manufacturer's expected profit in comparison with the situation without applying the option mechanism .

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Journal title

volume 22  issue 2

pages  135- 141

publication date 2011-06

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