A Flexible Supply Contract With Put Options

In recent years, bad economic situation and increasingly fierce market lead many companies to have great channel inventory. These phenomenon has seriously affected the company’s business. Therefore, How to reduce channel inventory business is becoming increasingly important things for this firms. Motivated by this problem, this thesis will study the method to reduce the channel inventory using the flexible supply chain contracts.This paper presents a single-period two-stage supply contract with put options in response to the demand with declining risks, in which the buyer can adjust the initial order downward before the selling reason. At the beginning of the planning horizon, the supplier provides a supply chain contract with put options in advance, and the buyer places an initial order and purchases options. By means of updating the demand forecast, the buyer exercises options to adjust the initial order downward within a certain range (quantity of options purchased). This paper formulates the buyer’s profit functions and develops explicit expressions to determine the buyer’s optimal decisions. Furthermore, it calculates the supplier’s expected profit function. In numerical study, this section analyzes this model from two aspects, i.e., the buyer and whole supply chain. Firstly, this paper illustrates that how the variation of parameters affects the buyer’s decisions and prove numerically that using put options can improve the buyer’s profit. Secondly, this paper obtains the optimal value of the unit put option price and the unit exercise price by data screening. What’s more, this thesis also illustrates that such a flexible contract strategy improves both the buyer’s and the supplier’s profits so that my model is an effective contract for the partners of supply chain.