The Reach Of Option Purchase Model Under Order Financing

Supply chain as a new form of organization, the coordinated development is significant, it brings challenges as well as opportunities for the enterprises in supply chain. Consider the characteristic of manufacturing SMEs in the supply chain:upstream facing large-scale suppliers of raw materials and downstream facing the core enterprise in the supply chain, the traditional contractual provisions and capital settlement unfavorable for them, besides, SMEs also faces the risks arising from fluctuations in raw material prices and market demand uncertainty. So solution for this situation has a practical significance.Be set in the trade between supply chain members, order financing is structured and self-liquidating, combined with the core enterprise’s credit level, can effectively solve the budget constraint of enterprise in supply chain. Option contract, as a quantity flexibility contract, allows the enterprise adjust the original order quantity according to the changes in market demand, compared with the traditional rigid contract, increasing the flexibility of the enterprises, at the same time, the price discovery and risk aversion function of the option provide a certain preventive effect for the risks of fluctuations in raw material prices.In this paper, order financing and options contracts were used in enterprises’operating decision, considering the two markets that faced:the certain demand from the core enterprises and the uncertain demand from the stochastic market. For the three-tier supply chain participated with upstream suppliers and downstream core enterprises, establishing the option purchase model under order financing, with core enterprise’s credit advantage, order financing could help to solve the financial problem, and using the option contract to cope with the uncertainty market demand. Finally, numerical simulation was conducted for the model.The main contribution of this paper:considering the actual situation that the supply chain manufacturers faced, for the two markets, combine the financial decision and the operational decisions together, using the order financing to solve the capital constraint problem while using the option contract to avoid the market risk. And according to the periodical character of the enterprise raw material procurement, ratchet option was used here to optimize the model.