A flexible contract strategy in a supply chain with an inflexible production mode

This paper presents a flexible supply contract with call options model for an inflexible supply chain, where the supplier only has an opportunity to produce one batch due to a long lead-time limitation. In such systems, there are eventually two decision points. At the beginning of the planning horizon, the supplier offers a wholesale price, and possibly also option purchasing and exercising prices. In addition to a firm initial order, the buyer can purchase options to adjust order quantity later. The supplier then determines the production volume. At the second decision point, with updated forecast, the buyer finalises the order quantity by exercising options. We formulate both the buyer's and the supplier's profit functions. Furthermore, we develop explicit expressions to determine the buyer's optimal decisions, and calculate the supplier's optimal decisions numerically. In numerical study, we illustrate that such a flexible contract strategy improves both the buyer's and supplier's profits.