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

Authors: Ming Dong, Shuyu Sun, Xiaoning Jin

Addresses: Antai College of Economics & Management, Shanghai Jiao Tong University, 535 Fahua Zhen Road, Shanghai 200052, PR China. ' Department of Mathematical Sciences, Clemson University, Clemson, SC 29634-0975, USA. ' Antai College of Economics & Management, Shanghai Jiao Tong University, 535 Fahua Zhen Road, Shanghai 200052, PR China

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.

Keywords: supply chain management; SCM; trading options; newsvendor model; game theory.

DOI: 10.1504/IJSOI.2009.026952

International Journal of Services Operations and Informatics, 2009 Vol.4 No.3, pp.258 - 271

Available online: 09 Jul 2009 *

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