The Application Of Option Theory In Supply Chain Risk Management Of Perishable Products

Perishable goods refer to the products those have long production lead time, short sales cycle, low remnant value of unsold products, big demand uncertainty, due to their self-characteristics or selection of their target consumers. Along with the improvement of living standards, individuation of consumers'demands, the product life cycle becomes shorter and shorter. Therefore, there is a growing concern and attention on perishable products supply chain management. At the same time, economic globalization and market integration aggravate the uncertainty of supply chain. Based upon those foundations, there is great theoretical significance to study perishable products supply chain risk management.In the actual perishable products supply chain, demand uncertainty risk and information risk are the biggest challenges. As the similarity of those above risks and financial market uncertainties, people introduced mature financial theory to perishable products supply chain risk management. Through the creation of options contracts, suppliers could have more flexibility in time of production decision-making; retailers could have more order flexibility. Simultaneously, options contracts can effectively control"Bullwhip Effect", coordinate the whole supply chain channels, and increase entire economic profits of the supply chain.This paper firstly analyzes the shortcomings of existing research, and then divides the application of option into two modules: nested-option and independent-option. In the nested-option part, this paper puts forward an option contract model including both call option and put option in a supply chain system which consist one single supplier and numerous retailers. In this model, we can get the decision-making formula of both supplier and retailers. Compared with the newsboy model, we discuss the role of nested-option in perishable products supply chain risk management. In the independent-option part, this paper firstly presents the limitations of"organized options trading", and then brings forward the concept of options trading, which could be divided into two stages: independent-option in close supply chain and in open environment. The paper tries to establish a model of independent-option in close supply chain, and gives the decision-making formula of both suppliers and retailers. From this model, we discuss the feasibility of independent-option and the role of independent-option in perishable products supply chain risk management.