Towards Strategy Model on Supply Chain Coordination with Option Contracts

The option contract is one of the effective financial instruments for avoiding risk. There always exists the risk in supply chain especially when facing uncertain or random demand. By introducing the real option into a two-stage supply chain, the part of the buyer risk due to demand uncertainty can be shifted to the supplier, and the supplier, in turn, is recovered by the additional revenue obtained from the option contract. The decision-making model without considering options is studied, and the optimal strategy model with option contract is established while market demand following stochastic distribution and a numerical example is also included to illustrate the feasibility of the coordination strategy model with option contracts.