Assessment of hedging strategy on supply chain performance with a single supplier and two retailers

Document Type : Article


1 School of Industrial Engineering, College of Engineering, University of Tehran, Tehran, Iran

2 School of Industrial Engineering, College of Engineering, University of Tehran

3 Postdoctoral Research Fellow Rayerson University, Canada


The previous studies have shown that the application of option contracts affects the coordination of the supply chain. Though, based on authors’ research there appears to be no survey conducted to measure the effect of hedging on supply chain from quantitative viewpoint. Generally, it is assumed that the product price is held fixed in the hedging; however, the competitors or the partners might sell the product cheaper. This condition restricts the hedger's opportunity to benefit. In this study we examine if the application of hedging through option contracts improves the performance of the total supply chain. To illustrate the answer, the supply chain consisting of one supplier and two retailers are considered. Regarding hedging, eight scenarios are created. The results indicate that the total supply chain profit is at the maximum benefit- among all possible scenarios- when hedging is completed properly. The research provides new insights that how hedging can maximize total supply chain profit, although it is possible that each individual member’s profit may not be maximized.