Risk analysis of supply contract with call options for buyers

Flexible supply contracts with options have been proposed to supply chains with long lead-times, short selling seasons and high demand uncertainties to improve the performance. In this paper, we analyze the risks of introducing options, and find that even if providing a higher expected profit at the...

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Bibliographic Details
Published in:International journal of production economics 2012-09, Vol.139 (1), p.97-105
Main Authors: Wang, Qunzhi, Chu, Bongsung, Wang, Jian, Kumakiri, Yuki
Format: Article
Language:English
Subjects:
Contracts
Forecast update
Put & call options
Quantity flexibility
Real options
Risk analysis
Risk assessment
Studies
Supply chain management
Supply contract
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Summary:Flexible supply contracts with options have been proposed to supply chains with long lead-times, short selling seasons and high demand uncertainties to improve the performance. In this paper, we analyze the risks of introducing options, and find that even if providing a higher expected profit at the beginning of a planning horizon, supply contracts with options may have risks associated with a worse performance later compared with the traditional newsvendor contract model. We derive two important parameters for the buyer to estimate the risks of introducing options. One is a risk indicator that can show whether using options-based contract model has risks or not, and the other is a ratio to measure the probability of such risks.
ISSN:0925-5273
1873-7579
DOI:10.1016/j.ijpe.2011.01.013