Incorporating the financial dimension in tactical production planning decisions

Abstract

T his thesis explores the impact of financial decisions and contract design on operational performance in a decentralized supply chain.Specifically, the study focuses on two financial aspects: debt financing and option contracts.Debt financing increases operational risk, while option contracts are examined as a means of managing profit-risk.This study finds that option contracts are a valuable tool for mitigating the adverse effects of supply chain decentralization, especially under financial constraints.By transferring a portion of the demand risk between supply chain members, option contracts can improve whole system performance by reducing the inventory and bankruptcy risk.This study considers that option contracts are offered alongside traditional wholesale price contracts to improve overall and each member of supply chain performance.These contracts do not need to replace existing agreements, as they are already established and priced in the market.Rather, offering option contracts as an additional tool can be more advantageous.Retailers can utilize option contracts to manage their risk and increase their own profits by increasing inventory level, while suppliers can use them to absorb demand risk which allows them to enhance their profits.This thesis presents a comprehensive analysis of a simple decentralized supply chain that operates under an uncertain demand.Chapter 1 provides an overview of the essential components of this supply chain structure, followed by a critical review of the relevant literature on contracts that aim to enhance supply chain performance.This chapter also addresses the financial constraints problem associated with managing supply chains.Chapter 2 presents a published paper that scrutinizes the decision-making process of a newsvendor-style retailer, who determines inventory levels and selling prices of his products.The retailer is the key partner in this model who is facing the demand directly.This chapter specifically examines the impact of demand uncertainty and return policies on the retailer's profit maximizing behavior.Chapter 3 broadens the study's scope to whole supply chain and explore scenarios where the supplier offers additional option contracts to reduce the retailer's inventory risk and increase her own profitability.These models are examined in the context of financial limitation, including situations where the bank serves as a creditor to both supply chain partners or where the supplier offers trade credit to the retailer.In this structure, because of absence of bankruptcy cost, tax and perfect market assumption, bank financing does not affect the operational decisions.Thus, chapter 4 concentrates on put option contracts and incorporates bankruptcy costs into the model.At the end of this chapter, numerical experiments are presented and compatible with analytical results.i Overall, this thesis offers an in-depth examination of the complexities of managing decentralized supply chains with uncertain demand, while offering novel insights into the effectiveness of contract-based approaches in enhancing supply chain performance and reducing financial and operational risks.Conclusion discuss the results of this work and management insights that derives from this analysis.