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Examining supply contracts under cost and demand uncertainties from supplier’s perspective: a real options approach

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  • Wenbo Shi
  • Tianke Feng

Abstract

Supply contracts have been widely utilised by practitioners to mitigate supply chain risks and disruptions while maintaining flexibility and stability. It is, thus, not surprising that buyers’ economically rational decisions towards supply contracts have been well studied. Missing in the literature, however, is examination of potential values and risks of supply contracts from supplier’s perspective. Motivated by this literature vacancy, this paper, using a real options approach, investigates a supplier’s acceptance decision towards a supply contract with variable cost and supply demand uncertainties. Through analytical and numerical examinations, conditions under which it is economically viable for the supplier to accept the supply contract are derived. This study also uncovers the impacts of variable cost and supply demand uncertainties as well as contract duration on the supplier’s acceptance decision. Also, there exists a range of contract duration beyond which the supplier should reject the supply contract offered by the client. To facilitate the understanding of this duration range, the corresponding shortest and longest contract duration is derived through numerical examples.

Suggested Citation

  • Wenbo Shi & Tianke Feng, 2016. "Examining supply contracts under cost and demand uncertainties from supplier’s perspective: a real options approach," International Journal of Production Research, Taylor & Francis Journals, vol. 54(1), pages 83-97, January.
    • Handle: RePEc:taf:tprsxx:v:54:y:2016:i:1:p:83-97
    DOI: 10.1080/00207543.2015.1008110
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    References listed on IDEAS

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    Cited by:

    1. Lennart C. Johnsen & Abdolkarim Sadrieh & Guido Voigt, 2021. "Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction," Production and Operations Management, Production and Operations Management Society, vol. 30(7), pages 2252-2272, July.
    2. Lijo John & Anand Gurumurthy & Arqum Mateen & Gopalakrishnan Narayanamurthy, 2022. "Improving the coordination in the humanitarian supply chain: exploring the role of options contract," Annals of Operations Research, Springer, vol. 319(1), pages 15-40, December.
    3. Gao, Yongling & Driouchi, Tarik, 2018. "Accounting for ambiguity and trust in partial outsourcing: A behavioral real options perspective," Journal of Business Research, Elsevier, vol. 92(C), pages 93-104.
    4. Goudarzi, Fatemeh (Sahar) & Olaru, Doina & Bergey, Paul, 2023. "Beyond risk attitude: Unpacking behavioral drivers of supply chain contracts," International Journal of Production Economics, Elsevier, vol. 255(C).

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