This paper studies a two-stage supply chain in which a retailer can either buy products directly, or purchase options on product. Under this scenario, we derive optimal replenishment policies for the retailer, optimal production policies for the supplier, as well as an expression for optimal expected profit. We demonstrate that options can enable supply chain partners to effectively share the risk associated with demand uncertainty. We also show the value of options for improving supply chain efficiency.
By: Dailun Shi, Richard Daniels (Univ. of GA, Athens), William Grey
Published in: RC21960 in 2001
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