Selection Analysis Of Option-Based Supply Contracts

In the past decades, many scholars have proposed option-based supply contracts for inflexible supply chain and they have proved that such contracts are effective ways to improve the profit of supply chain and its participants. The option-based supply contracts can usually be divided into three types:call option-based supply contract, put option-based supply contract and bidirectional option-based supply contract. Existing literatures mainly focus on the efficiency of such contracts. Few papers have concerned about the optimal contract selection among these option-based supply contracts in practical scenarios. For a specific scenario, decision-makers sometimes may be hard to select a proper one among the three similar types of option-based supply contracts.Considering information asymmetry will lead to different behaviors of the buyer and the supplier, which may be good/bad to the supply chain, this thesis intends to achieve the selection analysis of the three option-based supply contracts under the conditions of both asymmetric and symmetric demand information. In a two-stage supply chain operation, demand information includes two stages:one is the forecasted demand information at the planning horizon (the first stage); the other is the demand information updating at the beginning of selling season (the second stage). In the case of demand information symmetry, this thesis assumes that the buyer and the supplier share the demand information of the two stages. Existing literatures about option-based supply contract mainly based on this assumption. In the case of demand information asymmetry, this thesis assumes that the buyer and the supplier share the demand information of the first stage, while don’t share the demand information updating of the second stage. At the first stage, because of the long lead-time and high demand uncertainty, the demand forecast is macroscopic and of little value, the buyer is willing to share the information with the supplier. However, the demand information updating at the second stage is valuable, but may involve the buyer’s core competitiveness. The buyer may not want to share such information with the supplier.For the conditions of both demand information symmetry and asymmetry, this thesis set different scenarios to test and analyze the characteristics of every option-based supply contract. Also, this thesis achieve the selection analysis from three aspects, i.e., the supplier’s perspective, the buyer’s perspective and the whole supply chain’s perspective. And this thesis does find some significant managerial insights for decision-makers in selection.When demand information between the supplier and the buyer is symmetric, the decisions of contract selection are as follows. a) If the supplier only offers one contract, the best choice for him is the SCBO model in most scenarios. b) If the supplier offers three option-based supply contracts and the buyer selects one, the SCPO model will be the best mechanism in most scenarios, especially when the supplier’s ability of handling unsold products is low, the buyer’s capacity of handling unsold products is high or the shortage cost is pretty low. While, if the shortage cost is high or the buyer can effectively improve the value of demand forecast update, she may prefer the SCCO model. c) If one selects the optimal contract based on the supply chain performance, the SCBO model is definitely the best choice.When demand information between the supplier and the buyer is asymmetric, the decisions of contract selection are as follow. a) If the supplier offers one contract, the best choice for him is the SCBO model in most scenarios. b) If the supplier offers three option contracts and the buyer selects one, the SCCO model will be the best mechanism in most scenarios, especially when the supplier’s ability of handling unsold products is high, the buyer’s capacity of handling unsold products is low. While, if the buyer’s shortage cost is quite high, she may prefer the SCBO model. c) If one selects the optimal contract based on the supply chain performance, the SCBO model is definitely the best choice.Through the selection analysis of the three option-based supply contracts under the conditions of both symmetric and asymmetric demand information, this thesis finds out which option-based contract behaves much better than others in improving the corresponding profits of the supply chain and its participant in a specific scenario, and provides some managerial insights for decision-makers on optimal contract selection.