Price optimization in supply chain agreements: a comparative analysis of buyback and put option contracts for inventory risk management

This paper aims to provide a model of a supply chain in the integrated system and obtain its optimal decision variables. The paper introduces buyback and put option contracts to reduce inventory risk. These contracts were compared in three different cases via a numerical analysis approach. In the first case, the holding cost (h) of a retailer for surplus orders in the buyback contract is equal to the option price (o) in the put option model. The relationship between exercise price (e) in the put option model and buyback price (b) in the buyback contract was obtained by comparing the optimal values in the models. This study found that the exercise price in the put option contract will be greater than the buyback price. Furthermore, it is more likely that the retailer gave more benefits under the buyback agreement than the time the retailer chooses the put option contract. Therefore, it can be concluded that if the retailer chooses the buyback agreement in this situation, can gain more benefits. The study provides essential managerial insights to compare agreements and presents recommendations to choose a suitable contract.