Coordination in a retailer-led supply chain through option contract

This paper develops a model to study channel coordination and risk sharing in a retailer-led supply chain. Such chains are characterized by a dominant retailer who aims to coordinate the upstream production quantity. We investigate a coordinating contract based on an option with two parameters. An o...

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Bibliographic Details
Published inInternational journal of production economics Vol. 110; no. 1; pp. 115 - 127
Main Authors Wang, Xiaolong, Liu, Liwen
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.10.2007
Elsevier
Elsevier Sequoia S.A
SeriesInternational Journal of Production Economics
Subjects
Channel coordination
Contracts
Coordination
Economic models
Option contract
Retailer-led supply chain
Retailing
Risk sharing
Securities prices
Studies
Supply chains
Risk sharing
Option contract
Channel coordination
Retailer-led supply chain
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Summary:This paper develops a model to study channel coordination and risk sharing in a retailer-led supply chain. Such chains are characterized by a dominant retailer who aims to coordinate the upstream production quantity. We investigate a coordinating contract based on an option with two parameters. An option price is paid by the retailer for each additional unit of product reserved beyond the initial order. An exercise price serves as the unit purchasing price when the retailer sets a second order if realized demand is more than the initial order. A successful coordination needs two conditions. One condition is to maintain a negative correlation between exercise price and option price. Particularly, we draw the functional form. The other is that the firm commitment must be lower than the optimal production quantity in a centralized system. In a risk sharing mechanism, we prove that such a contract brings benefit to each party.
ISSN:0925-5273
1873-7579
DOI:10.1016/j.ijpe.2007.02.022