Paper Info
Title
Value of information through options contract under disruption risk.
Abstract
We model the replenishment strategy of a dual-sourcing buyer under disruption risk.We examine the benefits of an options contract with a reliable supplier.We consider three levels of information regarding the timing of option-exercise.We analytically characterize settings where the buyer chooses to single-source.The value of a flexible supplier increases as supply/demand uncertainty increases. 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.
Year
DOI
Venue
2017
10.1016/j.cie.2016.11.006
Computers & Industrial Engineering
Keywords
Field
DocType
Supply disruption,Dual sourcing,Options contract,Value of information
Value of information,Engineering,Supply and demand,Operations management
Journal
Volume
Issue
ISSN
103
C
0360-8352
Citations 
PageRank 
References 
1
0.35
15
Authors
2
Name
Order
Citations
PageRank
Hüseyin Köle110.35
Ismail Serdar Bakal2223.23