Improving the coordination in the humanitarian supply chain: exploring the role of options contract

TLDR

Uncertainty in disaster location, severity, and timing hampers humanitarian organizations’ ability to predict aid material demand, complicating procurement. The study investigates whether an options contract can reduce procurement challenges for humanitarian organizations by mitigating inventory risk for buyers and over‑production risk for suppliers, and by designing a pricing‑based coordination mechanism. The authors model the options contract as a stylized newsvendor problem, enabling humanitarian organizations to adjust order quantities after the initial order within the planning horizon. The options contract reduces over‑ and under‑stocking risks for humanitarian organizations and over‑production risks for suppliers, shows that optimal contract parameters lie within a price range that facilitates negotiation, and supports decentralized price setting to achieve systemic coordination.

Abstract

Abstract The uncertainty associated with the location, severity and timing of disaster makes it difficult for the humanitarian organization (HO) to predict demand for the aid material and thereby making the relief material procurement even more challenging. This research explores whether options contract can be used as a mechanism to aid the HO in making procurement of relief material less challenging by addressing two main issues: inventory risk for buyers and over-production risk for suppliers. Furthermore, a contracting mechanism is designed to achieve coordination between the HO and aid material suppliers in the humanitarian supply chain through optimal pricing. The options contract is modelled as a stylized version of the newsvendor problem that allows the HO to adjust their order quantity after placing the initial order at the beginning of the planning horizon. This flexibility helps to mitigate the risk of both overstocking and understocking for the HO as well as the risk of overproduction for the supplier. Our results indicate that the optimal values for decision parameters are not “point estimates” but a range of prices, which can facilitate negotiation between the two parties for appropriate selection of contract parameters under an options contract. The results imply that options contract can aid in the decentralized approach of fixing the prices between the HO and the supplier, which in turn would help in achieving systemic coordination.