Quantity flexibility contract for coordinating supply chain in presence of uncertainty

The purpose of this paper is to analyze the effectiveness of Quantity Flexibility Contract (QFC) as Supply Chain (SC) coordination mechanism under market demand and spot market uncertainty, by measuring such effectiveness in terms of the profits gained by each actor under QFC with respect to the profits obtained under traditional contract. In so doing and by varying the contract terms and implementation conditions, we ensure that the QFC is chosen only when it ensures a win-win condition, namely it improves the profits of both parties. A simulation-based research has been carried out in order to address this issue. In particular, a real options-based model has been developed to model and quantify the benefits granted by flexibility incorporated into the QFC, for both SC actors. A series of experiments consisting of different experimental settings was designed in order to investigate the effect that contract terms and implementation conditions have on the benefits of both actors and on the entire system. The proposed model's application and the experiments have been illustrated by considering an SC coordination problem handled by an example company operating as retailer in a European country through QFC.