Supply chain management and the use of long term supply contracts

This dissertation discusses three related problems concerning how long term contracts influence the activities of a buyer-supplier relationship.;A system composed of a supplier and buyer(s) is considered, where it is assumed that the supplier faces a known production lead time. The optimal delivery lead time is determined and its effect on the location of system safety stock is explored. It is shown that system safety stock should not be split between a buyer and supplier. Based on system cost parameters, production lead times, and standard deviations of demand distributions, conditions indicating when the supplier or buyer(s) should keep the system safety stock are derived. The impact of changes to these parameters on the location of system safety stock is examined. Extensions to the case of one buyer who acts as an assembler and many suppliers is discussed.;The use of contingent claims (options) along with fixed orders is examined in a buyer-supplier system. For any given set of parameters, the buyer's optimal order quantities are found. The supplier's optimal pricing strategy is examined. The resulting system profit is compared to the profit resulting from a centralized system which operates optimally and to the profit resulting from a system where options are not used. It is found that the use of options can greatly increase system profits. Furthermore, the profits in a decentralized system using options are very close to the profits of a centralized system using options.;A single product long term supply contract is analyzed which specifies that the cumulative orders placed by the buyer, over a finite horizon, be at least as large as a given quantity. In exchange for this commitment, the supplier is willing to offer the goods at a reduced price. For a penalty, the buyer may be released from the contract. Conditions under which it will be optimal to terminate the contract for each period are identified, and the optimal order-up-to quantity for each period, given that termination will not occur in that period is found.