Supply Chain Coordination Of Perishable Products By Option Contracts With Demand Information Updating

Perishable goods are those with long lead time, short product life cycles, low salvagevalue and highly unpredictable demands. With the rapid development of science andtechnology, innovation is promoted faster than before and then the product life cycle isgradually shortened, as a result, more and more products have the characteristics of perishablegoods, which mean the perishable goods have become an important part of national economy.Besides, with the improvements of living standards, customer demand tends to diversificationand personalization, and customers require a higher service level. These two features leads toa more highly unpredictable market demand, which cause the demand forecast more difficultand the accuracy of forecast decreases. Therefore, both the manufacturer and the retailer losethe reliable basis for their own decisions, and it is difficult for the supply and the demand toachieve consistent. The mismatch will result in overstock or shortage, both of which areimportant issues that supply chain members have to resolve.The two-stage production and order policy with demand information updating developsin this context, and it means the retailer has an opportunity to adjust its order level accordingto the updated forecast information before the season begins, and the manufacturer will start asecond run of production to meet the retailer's second order. However, the policy has to face adifficulty that the retailer has no opportunity to adjust its order level once the selling seasonbegins and it has to bear the risk of excessive ordering. Maybe the manufacturer allows theretailer to return the unsold products at the end of selling season, or provides subsidies for theoverstock products. Obviously, this means the manufacturer has to bear the risk ofoverproduction. Moreover, the return process is visible and it must bring logistics cost such ashandling cost and transportation cost, and opportunity cost due to time consumption.Nevertheless, if the retailer purchase some options along with the firm orders andexercise the options according the actual market demand, there will be no overstock risk. Theprocess of exercising options is that of returning products in essence, but it doesn't bringbuyback cost; moreover, the risk of overproduction for the manufacturer has been shared bythe retailer through the option price. Thus, option contracts can achieve risk-sharing and alsorevenue-sharing and has been applied in the supply chain coordination with demand information updating. This dissertation focuses on a two-stage supply chain withsingle-manufacturer and single-retailer and introduces option contracts to coordinate thesupply chain, considering changing decision-making position of option purchase and exercise,excavates new form of option application, and provides new choice for the supply chainmembers to develop partner relationship. Overall, the dissertation considers four cases:(1) Exercise the option purchased at the beginning of the lead-time after the demandforecast information is updated just before the selling season starts: at the beginning of thelead-time, the retailer places firm orders and purchases some options at the same time. Themanufacturer then organizes the production plan; after the demand forecast updates, theretailer decides the quantity of options to exercise, and the manufacturer prepares for thedelivery of the products, purchased by exercising options, with just-in-time mode.(2) Purchase a few quantities of options after the demand forecast is updated, whichmeans the option purchase is separated from the firm order: the retailer just places firm ordersat the beginning of the lead-time, and buy some options to adjust the firm order after thedemand forecast is updated. When the selling season comes, the retailer observes therealization of the actual demand, and decides whether to exercise and the correspondingquantity of options to exercise.(3) Purchase products completely through options: the retailer place option orders at thebeginning of the lead-time, and adjust the quantity of options after the demand forecastupdates. At the very first beginning of the selling season comes, the retailer observes therealization of the actual demand, and decides the quantity of options to exercise.(4) Consider the two-stage production and order policy in the context that the demand inthe two stages is correlated: the retailer places firm orders for the first-stage demand of sellingseason and purchase some options preparing for the second-stage demand of the sellingseason. During the selling season, which is divided into two unequal lengths, the retailersatisfies the first-stage demand with the products delivered by firm order, observes therealization of the first-stage demand, and decides the specific quantity of options to exercise.The manufacturer delivers the products for the second-stage demand with just-in-time mode.The corresponding conclusions for the above four cases are as follows:(1) When the retailer exercises options after the demand forecast is updated and the manufacturer delivers the products with just-in-time mode, the supply chain can becoordinated. However, the unidirectional option contracts just benefits the retailer, and themanufacturer is worse off and always keeps negative profit. Oppositely, the bidirectionaloption contracts not only maximizes the total supply chain profit but brings Paretoimprovements for the profits of both the manufacturer and the retailer.(2) When the retailer purchases options after the demand forecast is updated, to adjustthe firm order, supply chain coordination can be realized. Both the unidirectional option andthe bidirectional option contracts are effective. The former is easier to administrator and thelatter is more flexible.(3) When the retailer places no firm orders and just purchase options to reserve capacity,the contracts can be designed to coordinate the supply chain. Moreover, the designedcontracts can allocate the system profit arbitrarily between the manufacturer and the retailer.The allocation of additional profit from coordination is related to the negotiating power andrisk-adverse characteristics of the supply chain members.(4) When the demands in the two stages of the selling season are correlated, optioncontracts can be designed with piecewise form, which means the retailer should commit aminimum quantity that he would exercise and the commitment makes the retailer enjoys aprice discount for both option purchase and option exercise. This kind of policy cancoordinate the supply chain; however, the manufacturer earns nothing from coordination andkeeps zero profit under the option contracts. Nevertheless, when the manufacturer allows theretailer return unsold products at the end of the selling season, the supply chain could becoordinated. Moreover, the correlation parameter of the demands in the two stages has apositive effect on the supply chain profit, the higher the parameter is, and the earlier thesecond-stage decision point is.