The Effects of the Option Contracts in Supply Chain Management with Random Yield

This paper examines a single-period two-party supply chain with one retailer and two suppliers: a random yield supplier and a stable yield supplier. The retailer order products from the two suppliers, first order products with a deterministic demand from the random yield supplier with a lower price, and then order products from the stable yield supplier with a higher price to meet the demand. The retailer orders products from the random yield supplier by wholesale contract and from the stable yield supplier by wholesale contract, option contract, and combined contract. We develop game models to explore the retailer's optimal ordering policy and the stable yield supplier's optimal producing policy under three kinds of ordering methods, the wholesale contract, the option contract and the combined contract. Our results show that option contracts can improve the retailer's optimal order quantity and the stable yield supplier's optimal production, which can also increase the profits of both the retailer and the stable yield supplier. So, we get that the option contracts can benefit both the retailer and the stable yield supplier's order quantity and profits. And the option contracts can effectively reduce the losses from random yield, which is conducive to improving the overall efficiency of the supply chain and providing equal benefits for all members.