Designing supply contract to coordinate supplier-manufacturer interactions

In this paper we develop a single period supply contract model between a manufacturer and his major component supplier. We have studied how a manufacturer who is trying to achieve customer oriented production systems, should design has supply contract. practical motivation for our paper comes from industries with innovative products. A coordinating contract based on option mechanism with two parameters (o,e) is used as supply contract. an option price (o) is paid by the manufacturer for each additional unit of product reserved beyond the initial order. an exercise price serves as the unit purchasing price when the manufacturer sets a second order if realized demand is more than the initial order. Necessary conditions for coordination in this environment are obtained. Our analysis show that the manufacturer’s optimal decisions can be the way that satisfy these conditions. Also the manufacturer and the supplier both can achieve to win-win conditions and improve their expected profits in comparison with expected profits before applying the option contract.

Keywords:

supply chain coordination , contract design , option contract , customer oriented production