A Flexible Supply Contract With Bidirectional Options

In recent years, increasingly fierce market competition leads many companies to pay special attention to producing innovative products, which are always characterized by long manufacturing lead-times, short selling seasons and high demand uncertainties. But the performance of the supply chain of these kind products always is inefficient, due to using an inflexible supply contract, for instance newsvendor model. In order to improve the performance of this kind supply chain, many flexible supply contract models have been proposed.A flexible supply contract with bidirectional options (SCBO) also has been proposed in a single-supplier single-buyer supply chain and analyzed from the buyer’s perspective by Wang and Tsao (2006). It has been proved that the buyer’s profit can be improved by using SCBO.To be a practical contract, however, SCBO should also improve the supplier’s profit. Otherwise, the supplier is unwilling to accept such contracts. This thesis focuses on this problem and analyzes whether SCBO is a practical supply contract or not. Based on Wang and Tsao (2006), this study formulates the supplier’s profit function, describes both parties’ optimal behaviors, and concludes that SCBO model can simultaneously benefit both the supplier and the buyer so that SCBO is a practical contract.Since providing more flexibility may increase the risks associated with overproduction, radical suppliers may share partial risks with the buyer in order to have a chance to increase selling quantity, while conservative ones may not do so.In this thesis, therefore, two cases are considered:radical suppliers and conservative suppliers. Under these two cases, in numerical study, this study analyzes how the supplier and the buyer react in the SCBO model for various parameters and provide managerial insights. More specifically, this thesis also demonstrates that the phenomenon of double marginalization can be reduced when using SCBO model. Finally, two cases are compared in three aspects:flexibility, profits and value of demand forecast update.