Designing Flexible Supply Chain Contracts with Options

Consider a supply chain consisting of a supplier and a buyer with the supplier selling raw materials or
components to the buyer, a manufacturing firm, which in turn sells finished products to end customers with random demands. In a decentralized setting, each party will attempt to maximize its own profit objective and often based on its private information. It has been widely recognized that the supplier and the buyer can benefit from coordination and thereby improve the overall performance of the supply chain as a whole, as well as, though not necessarily always, the performance of each party individually. Coordination between the two parties can be achieved by various means, for example, information sharing. Marketing and negotiation strategies can also be designed to provide incentives that induce coordination.

By: Feng Cheng; Markus Ettl; Grace Lin; Maike Schwarz; David D. Yao

Published in: RC23917 in 2006


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