On Game Models Of Supply Chain With Option Contracts In The Case Of Random Yield And Stochastic Demand

Due to the intensifying competition, advancing technology and rapid changing market, the life spans of products are getting shorter and shorter while problems caused by demand uncertainty are increasingly prominent. The management of demand uncertainty has long been the key issue of supply chain management as well as the focus of scholars in this field.Besides demand uncertainty, in such fields as electronics and semiconductor manufacturing industry, agriculture, chemistry and refabricating, there is yield uncertainty as well. In the course of raw materials processing, products making or parts assembling, the natural condition, technique levels or management all may lead to yield uncertainty. The stochastic yield and random demand pose a serious challenge to supply chain management.In addition, the rapid development of the internet and information technology has driven an increasing number of companies to take the e-commerce based spot markets as a new way to avoid the uncertainty in market demand and risks in supply availability. However, compared with the contract market, the spot market is characterized by greater competition, bigger price fluctuation and extreme instability. Therefore, contract markets are still preferred by companies while the spot market is usually taken as a supplementary.The scenario where both the spot market and the contract market exist is something the supply chain companies have to face when making decisions. Under such circumstance, the key to effectively hedge the risks a company faces lies in the selection of supply chain contracts. In recent years, option contracts have been widely adopted in supply chain risk management and been given importance by the academic circle. Many scholars have studied the management of supply chain with option contracts from various perspectives, but most of these studies focus on demand uncertainty while ignore the yield uncertainty. Therefore, it is of great practical significance and theoretical value to study the game models of supply chain with option contracts in the case of stochastic demand and random yield.This paper considers a two level supply chain consisting of a parts supplier with random yield and a manufacturer with stochastic demand, assuming both sides can buy/sell parts on the spot market. By building game models for supply chains with call option, put option and bidirectional option respectively, this paper systematically studies the ordering, manufacturing and coordinating optimal policies for the supply chain with both stochastic demand and random yield in the case that there are both a spot market and an option contract market. The paper is organized as follows:I. By studying the order decision making models of the manufacturer with option contracts, This paper reveals that:(1) when the wholesale price, option order price and exercise price meet certain requirements, a unique order quantity for the manufacturer with option contracts exists;(2) in the case of call option contracts, the optimal order quantity of the manufacturer without option contracts is bigger than the firm order quantity of the manufacturer with call option contracts, while smaller than the total order quantity of the manufacturer with call option contracts. The maximum expected profit of the manufacturer is bigger with option contracts than without. The increment of the manufacturer’s order and profit resulting from the introduction of call option does not vary with the changes in yield risks, but increases with the growth of risks in demand and spot price;(3) in the case of put option contracts, the optimal firm order quantity of the manufacturer is bigger with put option contracts than without. The increment of the manufacturer’s order and profit resulting from the introduction of put option does not vary with the changes in yield risks, but increases with the growth of risks in demand and spot price;(4) in the case of equal option order price and call option exercise price, bidirectional option is better than the call option. However, compared with call option, the manufacture’s option order cost and call option exercise cost may be higher in the case of bidirectional option.II. By studying the production decision making models of the supplier with option contracts, This paper reveals that:(1) when the wholesale price, option order price and exercise price meet certain requirements, a unique production quantity for the supplier with option contracts exists;(2) in the case of call option contracts, the optimal production quantity of the supplier with option contracts is bigger than that of the supplier without call option contracts. The maximum expected profit of the supplier is bigger with option contracts than without. The increment of the supplier’s production and profit decreases when the yield risks increase, but increases with the growth of risks in demand and spot price;(3) in the case of put option contracts, the optimal production quantity of the supplier with put option contracts is bigger than that of the supplier without option contracts. The maximum expected profit of the supplier is bigger with option contracts than without. The increment of the supplier’s production and profit resulting from the introduction of put option decreases when the yield risks increase, but increases with the growth of risks in demand and spot price;(4) both the supplier’s excise price that can achieve the maximum profit and the call option order price are higher in the case of bidirectional option than in the case of call option.III. By studying the coordination of the supply chain with yield random and demand uncertainty in the case of option contracts, this paper reveals that when considering a spot market, neither the call option, the put option nor the bidirectional option can coordinate the decentralized supply chain with random yield and stochastic demand. However, when the parameters of the contract meet certain requirements, the revised call option, put option and bidirectional option contracts can coordinate the decentralized supply chain with random yield and stochastic demand. In addition, the supplier can achieve Pareto-improve by setting proper wholesale price, option order price and exercise price, so as to make both the supplier and the manufacturer willing to accept the revised call option, put option and bidirectional option contracts.