Supply contracts for critical and strategic materials of high volatility and their ramifications for supply chains

K. Jo Min, Laura Lilienkamp, John Jackman and Chung-Hsiao Wang

The Engineering Economist, 2020, vol. 65, issue 4, 266-287

Abstract: For critical and strategic materials such as a rare earth element or crude oil, we study a supply chain consisting of an intermediary/producer facing a highly volatile market to its customers and a local supplier at a different region subject to a fixed term supply contract. By viewing the opportunity to sign this contract as a real option, we construct a supply contract model and analytically derive the optimal contract-signing threshold price from the intermediary/producer perspective. Based on this threshold, we show how the relationship among the threshold price, lead time, and contract duration results in a classification of the supply chain’s preferences for lead time length, and to concrete guidelines for using the lead time and contract duration as tradable negotiation tools for supply chain contracts.

Date: 2020
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DOI: 10.1080/0013791X.2020.1712508

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