Annals of Operations Research

, Volume 257, Issue 1–2, pp 697–719 | Cite as

Risk hedging via option contracts in a random yield supply chain

Article

Abstract

This article investigates the role of option contracts in a random yield supply chain in the presence of a spot market. Considering a single-period supplier-manufacturer system where the supplier with random yield produces key components for the manufacturer and the manufacturer assembles/processes the components into end products to meet a deterministic market demand, we develop game models to derive the manufacturer’s optimal ordering policy and the supplier’s optimal production policy under two contract mechanisms (with and without option contracts). Our results suggest that option contracts can coordinate the manufacturer’s order quantity as well as the supplier’s production quantity, and eventually achieve optimal supply chain performance, i.e. the random yield supply chain can be completely coordinated with option contracts in our setting. However, our study also reveals that the supplier and the manufacturer are not always better off with option contracts than without. Therefore, the conditions on which Pareto-improvement is achieved are provided in this paper. Finally, by adopting numerical examples, we draw additional managerial insights into managing random yield supply chains in the presence of spot market.

Keywords

Supply chain management Random yield Spot market  Option contracts 

Notes

Acknowledgments

The authors are grateful to the Editors and the reviewers for their insightful and constructive comments. This research is partially supported by the National Natural Science Foundation of China (Nos. 71272128, 71432003), Program for New Century Excellent Talents in University (No. NCET-12-0087), and Specialized Research Fund for the Doctoral Program of Higher Education (No. 20130185110006).

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.School of Management and EconomicsUniversity of Electronic Science and Technology of ChinaChengduChina

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