Make-to-order supply chain coordination through option contract with random yields and overconfidence

Lingling Wang, Yong Wu and Shengqiang Hu

International Journal of Production Economics, 2021, vol. 242, issue C

Abstract: This paper investigates a two-echelon supply chain with a supplier and a manufacturer with yield uncertainty. We assume that the manufacturer is overconfident about its yield and examine how this could impact on the performance for each company and the supply chain. We propose option contracts to be used to coordinate the ordering and production across the supply chain. A wholesale price contract without overconfidence (i.e., with complete rationality) about the manufacturer's yield is first developed as a benchmark. Based on that, we analyze the impact of overconfidence on the decisions and the expected profits for each player in the supply chain under the wholesale price contract. This setting is then applied to the case of option contracts. We derive analytical results on the decisions and the expected profits, and propose conditions for the option price and the option execution price to achieve supply chain coordination. Overall we find that overconfidence has an adverse impact on the performance of both companies. Their expected profits will decline as the level of overconfidence goes up. Option contracts can improve the performance for both companies but cannot completely eliminate the impact of overconfidence. This paper therefore could be used to guide the coordination and cooperation of companies along a supply chain when there exists yield uncertainty and overconfidence. Our propositions are validated through numerical experiments on a hypothetical case and supported by extensive parameter sensitivity analyses.

Keywords: Make-to-order; Random yields; Overconfidence; Wholesale price contract; Option contract; Supply chain coordination (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0925527321002759
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:242:y:2021:i:c:s0925527321002759

DOI: 10.1016/j.ijpe.2021.108299

Access Statistics for this article

International Journal of Production Economics is currently edited by Stefan Minner

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().