Risk analysis of commitment–option contracts with forecast updates

John Buzacott, Houmin Yan and Hanqin Zhang

IISE Transactions, 2011, vol. 43, issue 6, 415-431

Abstract: The standard treatment of supply chain models largely focuses on the optimization of the expected value of a given cost or profit measure. Due to highly uncertain supply and demand conditions, the use of the expected objective measure may not be justified. This article studies a class of commitment–option supply contracts in a mean-variance framework. With structure properties established it is shown that a mean-variance trade-off analysis with advanced reservation can be carried out. Moreover, it is indicated how the corresponding contract decisions differ from decisions for optimizing an expected objective value.

Date: 2011
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DOI: 10.1080/0740817X.2010.532851

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