| In recent years, supply contracts have gained considerable attention from both practical and theoretical perspectives as they are powerful instruments in managing various sources of uncertainty inherently present in supply chains. In this research, we particularly focus on demand risk, management of which is quite important in capital-intensive industries. We consider various forms of supply contracts and investigate the optimal and close-to-optimal policies for both tactical (i.e., capacity) and operational (i.e, inventory) decisions.; In the first part of the dissertation, we investigate the optimal inventory decisions under two contract structures. We first consider the dual supply problem and analytically explain the changes in the optimal policy parameters with respect to problem parameters using certain functional properties. We then investigate the more general multiple supply problem and show that this problem is structurally equivalent to the quantity flexibility contracts commonly used in practice. We show that the optimal solution can be found with the same method in both settings. This result is also a meta-theorem explaining many well-known results in the inventory management literature, such as the optimality of the base-stock policy in the single supply problem. In the second part of the dissertation, using the preliminary results of the first part, we explore the interaction of capacity and inventory decisions. We first consider a dual supply scenario and analytically characterize the optimal capacity reservation policy, which is computationally intractable due to high dimensions of state and decision variables. As an alternative, we propose a plausible and managerially insightful policy, and compare its performance with the optimal solution as well as an analytical lower bound on the optimal cost. Finally, we consider a contract with flexible terms, inspired by options used in the finance literature. In particular, we focus on a supply scenario in the semiconductor industry, where the demand for end-products is highly uncertain due to factors such as the rapid changes in technology and customer expectations, shortening life-cycles, and high competition. We analyze the advantages of using this flexible contract to manage demand risk in such an environment. |
