Wholesale Price Contract or Mixed Wholesale-Option-Contract? Procurement Strategy for a Contract Farming Supply Chain under Flexible Supply

Abstract

Due to the uncertainty of world economic development, market demands are stochastic and the supply quantities of suppliers in the supply chain are always flexible, so a mixed wholesale-option-contract (abbreviated as a mixed contract) is one of the good ways for commodity distributors to cope with flexible supply. For a contract farming supply chain composed of a distributor and two suppliers under random demand and yield, we propose the new mixed contracts with flexible supply for the players to make better procurement and inventory decisions. Therefore, with decentralized decision making with a wholesale price contract and centralized decision making as benchmarks for comparison, the advantages of mixed contracts were demonstrated in this paper. The expected profit function under each transaction mode was proved to be concave and the optimal orders or production quantities were obtained and compared. Theoretical derivation and numerical examples were carried out and the main conclusions are as follows. First, the distributor’s total order quantities are the largest under centralized decision making, then the second largest under mixed contracts, then the least under wholesale price contracts. Second, for the dealer under mixed contracts, within the feasible range, the smaller the option price (or option exercise price) is, the greater the dealer’s profit is. Third, with increasing initial order quantity, the gap between the dealer’s profits under different option prices (or option exercise prices) narrows, and eventually tends to the same point. For both the suppliers as a whole, a mixed contract is better than the wholesale price one. Fourth, when the prices of the option contract change within a reasonable range (they may not be too small or too large), the profits of both the dealer and suppliers under a mixed contract are not only higher than those under the wholesale price contract, but also higher than those under centralized decision making. Finally, policies and suggestions (such as full investigation, explicitly defining the process of contracts, establishing real-time supervision and information sharing mechanisms, and so on) were put forward to improve the accuracy of supply and demand forecasting, better implement mixed contracts under flexible supply, and strengthen reforms about agricultural supply side.