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

Ming Dog, Shuyu Sun, Xiaoning Jin

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)258-271
Number of pages14
JournalInternational Journal of Services Operations and Informatics
Volume4
Issue number3
DOIs
StatePublished - Jul 22 2009

Keywords

  • Game theory
  • Newsvendor model
  • Options
  • Supply chain management

ASJC Scopus subject areas

  • Management Information Systems
  • Information Systems
  • Computer Science Applications
  • Management Science and Operations Research

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