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Modelling and analysis of newsvendor-based trading options in supply chains

Modelling and analysis of newsvendor-based trading options in supply chains Options are introduced into supply chain management to improve the capability of handling demand uncertainty and hence seek better performance of the participants. An option model based on the newsvendor problem is presented to quantify and price a trading contract in a supply chain. With trading options, buyers (or retailers) can either order products from suppliers or purchase options from other retailers, and decide whether to buy or sell their remaining options in the second period after demand is realised in the first period. This paper examines how trading options work in a supply chain consisting of one supplier and a set of retailers in both competitive and cooperative scenarios. Using the concept of best response in game theory, the outcomes of option trading with interdependent demands are analysed. Depending on the current inventory, options in hand and demand information of the second period, the optimal trading quantity in the non-interdependent demand model could be found, where trading quantity is irrelevant to options price. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Services Operations and Informatics Inderscience Publishers

Modelling and analysis of newsvendor-based trading options in supply chains

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Publisher
Inderscience Publishers
Copyright
Copyright © Inderscience Enterprises Ltd. All rights reserved
ISSN
1741-539X
eISSN
1741-5403
DOI
10.1504/IJSOI.2009.026952
Publisher site
See Article on Publisher Site

Abstract

Options are introduced into supply chain management to improve the capability of handling demand uncertainty and hence seek better performance of the participants. An option model based on the newsvendor problem is presented to quantify and price a trading contract in a supply chain. With trading options, buyers (or retailers) can either order products from suppliers or purchase options from other retailers, and decide whether to buy or sell their remaining options in the second period after demand is realised in the first period. This paper examines how trading options work in a supply chain consisting of one supplier and a set of retailers in both competitive and cooperative scenarios. Using the concept of best response in game theory, the outcomes of option trading with interdependent demands are analysed. Depending on the current inventory, options in hand and demand information of the second period, the optimal trading quantity in the non-interdependent demand model could be found, where trading quantity is irrelevant to options price.

Journal

International Journal of Services Operations and InformaticsInderscience Publishers

Published: Jan 1, 2009

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