Coordination of Supply Chains by Flexible Option Contracts

This paper studies coordination in a supply chain with one manufacture and one retailer using the flexible supply contracts via call options. First we derive the manufacture's optimal production decisions and the retailer's optimal order decisions. Then we obtain an contract set, in which any option contract can coordinate the supply chain. We also prove that using the option contracts in this set, the manufacture's profit, the retailer's profit and the supply chain's total profit can also increase, compared with the wholesale price contract.