An American option contract toward supply chain coordination

Coordination improves the profit of all the members in a supply chain. In this paper, a novel coordination mechanism is introduced in a retailer-manufacturer supply chain in which the retailer can adopt either an American option mechanism or a wholesale mechanism to satisfy the market demand throughout a multi-period horizon. The manufacturer follows a make-to-order production policy. This mechanism gives the retailer the right to select the more beneficial mechanism in each period. The retailer as the leader of the chain decides how many options should be purchased at the beginning of the horizon through a mixed-integer mathematical model. This model addresses the uncertainties in the market demand and the market price, simultaneously. A scenario planning approach is used to treat the random variables within the model. Also, an optimal scenario reduction model is adapted to reduce the computational complexity of the problem. Finally, a numerical experiment is designed to validate the performance of the model. The results demonstrate a remarkable improvement in the profit of both members. Moreover, a number of experiments are performed to show how the option price, the exercise price and the interest rate affect the performance of the contract