Risk Analysis Of Flexible Supply Chain Contract With Put Options For Buyers

This paper mainly considers a single-period two-stage supply contract with put options. Based on prices provided by the supplier, the buyer purchases put options and an initial order at the beginning of planning period (the first stage). During the long lead-time (the time between the first and the second stage), the buyer collects the demand information to have a better demand forecast and the supplier produces the commodities. At the beginning of selling season (the second stage), with updated demand information, the buyer finalizes the order quantity by exercising put options. Recently, from different perspectives, some scholars have proved that such a supply contract can increase buyers’profit and improve the supply chain performance at the first stageDue to the long production lead-time and the high demand uncertainty, it is difficult to say the supply contract with put options also improve the buyer’s performance at the second stage. That is, the introduction of put options in supply contract may have risk for a worse performance at second stage compared with the traditional newsvendor contract model.After introduction and calculation of newsvendor contract model and supply contract with put options models, this paper discusses the risks associated with lower profit for the buyer of supply contract with put options models. And this paper gets some conclusions:1). Although the flexibility of put options can improve the value of the supply contract with put options, while, the cost for such flexibility will increases the risks associated with lower profit for the buyer; 2). When the final order of supply contract with put options is equal to that of the traditional newsvendor contract, the risks associated with lower profit are maximal; 3). If the options are valuable to the buyer, the possibility of the risks associated with lower profit is small for the buyer of supply contract with put options, especially for the products that have low salvage value and high shortage cost. Moreover, if the buyer can improved the forecasting error greatly by updating demand information, the risks associated with lower profit of supply contract with put options can be reduced effectively.