Supply chain coordination for short-life-cycle products with option contract and partial backorders

This paper develops a newsboy problem with option contract and partial backorders. In this option contact policy, if the demand exceeds the order quantity, the retailer may have a second replenishment opportunity to order an option quantity from the manufacturer in order to fulfil its backorders. The study derives the optimal solutions for an integrated and decentralised system with a single manufacturer and retailer. The result shows that the integrated system has a greater profit than the decentralised system irrespective of the backordering rate. When the backordering rate is greater than a certain value, the optimal decision is to backorder all the demand from the option quantity. This study provides managerial insights in selecting a revenue-sharing contract to obtain the optimal price and order/option quantity that maximises the supply chain profit. [Received 24 November 2010; Revised 19 February 2011; Revised 07 May 2011; Accepted 21 June 2011]