Improving the coordination in the humanitarian supply chain: exploring the role of options contract
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Improving the coordination in the humanitarian supply chain: exploring the role of options contract Lijo John1 · Anand Gurumurthy2 · Arqum Mateen2 · Gopalakrishnan Narayanamurthy3 © The Author(s) 2020
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. Keywords Humanitarian supply chain · Options contracts · Newsvendor problem · Coordination · Procurement
1 Introduction The procurement of aid material is a critical function in the humanitarian supply chain (HSC), and the procurement managers at the humanitarian organization (HO) often try to balance between cost and responsiveness in their planning. Moreover, the HO has to respond to different types of disasters, which require a variety of relief items ranging from simple supplies (e.g. food) to complex equipment (e.g. radios, batteries, machinery, etc.) (Lamenza et al. 2019). Thus, HO needs different kinds of products with different characteristics, demand
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Annals of Operations Research
variability and procurement sources. The challenges in meeting the demand of aid material in HSC is different from the commercial supply chain (CSC). The timing, location, severity of the disaster, institutional stability, and special requirements based on the geography and/or culture of the affected area have to be considered while offering solutions (Wamba 2020) and thereby adds to the complexity of the procurement process in HSC (Balcik 2014). Also, in the interest of the responsiveness, the HO seldom resort to time-consuming bidding based procurement during the post-disaster response stage (Ertem et al. 2
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