Research On Capacity Coordination Of Service Supply Chain With Option Contracts

This paper studies the capacity decision of a service supply chain with option contracts. The service supply chain consists of a client and a supplier who has been hired by the client and delivered service to customers. The market demand is stochastic, while each served customer generates a value for the client and any available services incurs costs for the supplier. The contract between the client and the supplier is described as the transfer payment. In particular, a service supply chain is the service outsourcing system which is characterized as a supply chain. This paper describes the client’s, the supplier’s, and the total expected profit in model formulations. With the traditional inventory supply chain, a service supply chain has a similar problem of capacity shortage under wholesale contracts, where the differences are the marginal structures. To improve the performance of a service supply chain, this paper proposes option contracts to motivate the supplier to level up the capacity, including forced compliance option contract and unforced compliance option contract. Under forced compliance, the supplier’s capacity decision is trivial, which is forced to equal the sum of client’s initial purchasing and option purchasing. Under unforced compliance, the supplier is free to choose the capacity as the capacity decider, while it is proven the unforced compliance relegates the option contract to a wholesale mechanism with a meaningless option fee. This paper examines the forced compliance using the Stackelberg game approach, under which the supplier decides the option price acting as a leader and the client decides the purchasing as the follower. After defining two meaningful option prices, the supplier’s optimal option price and the client’s indifferent option price, this paper shows the option contract can improve the chain performance while the supplier’s optimal option price cannot coordinate the capacity of the service supply chain. In addition, it is proven the supplier will extract all the profit improvements under capacity coordination circumstance, as a result of the applying client’s indifferent option price. The results of this paper provide contracts guidance to the supplier of a service supply chain and operation instruction for the whole chain.