Modeling of Capacity Reservation and Supplier Selection Based on Option Contract

A key issue for manufacturing firms is planning for outsourced components. in this research, we have considered a manufacturer in a make-to-order production environment who has to outsource a special component from a set of suppliers. one selling season is considered and the manufacturer faces uncertain demand during the selling season. a good strategy for the manufacturer to balance both holding and lost sale costs is to initiate capacity reservation contracts with his suppliers. thus, unlike the previous researches we have presented a mathematical model based on option mechanism that will help the manufacturer to select appropriate suppliers and order allocation, simultaneously. the considered option mechanism has a two part contract fee structure (option price and exercise price) and it is at the foundation of practical contracts used by different industries. a numerical example is used to illustrate the model and to investigate how option mechanism improves manufacturer's expected profit in comparison with the situation without applying the option mechanism.