Value of information through options contract under disruption risk

Kole H., BAKAL İ. S.

COMPUTERS & INDUSTRIAL ENGINEERING, vol.103, pp.85-97, 2017 (SCI-Expanded) identifier identifier

  • Publication Type: Article / Article
  • Volume: 103
  • Publication Date: 2017
  • Doi Number: 10.1016/j.cie.2016.11.006
  • Journal Name: COMPUTERS & INDUSTRIAL ENGINEERING
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Scopus
  • Page Numbers: pp.85-97
  • Keywords: Supply disruption, Dual sourcing, Options contract, Value of information, SUPPLY DISRUPTIONS, ASYMMETRIC INFORMATION, RESERVATION CONTRACTS, INVENTORY MANAGEMENT, BACKUP SUPPLIERS, RANDOM YIELDS, DIVERSIFICATION, UNCERTAINTY, CAPACITY, SYSTEM
  • Middle East Technical University Affiliated: Yes

Abstract

In this study, we consider the replenishment strategy of a buyer with two suppliers. Since its regular supplier is prone to disruptions, the buyer utilizes an options contract with a more expensive but perfectly reliable supply option. We introduce three models depending on the level of information available when the options from the reliable supplier are exercised: (i) Full information (both supply and demand information), (ii) partial information (only supply information), and (iii) no information. We derive the optimal replenishment strategy of the buyer in each of these models and characterize the conditions under which the reliable supplier is utilized. Through both analytical and numerical studies, we investigate the effectiveness of an options contract under different levels of information. (C) 2016 Elsevier Ltd. All rights reserved.