The investment strategies for a dynamic supply chain under stochastic demands

A successful supply chain management (SCM) should aim to maximize the net present value of joint profits along the supply chain. However, the volatile market conditions cause the future cash flows along the supply chain more difficult to anticipate. To obtain higher supply chain value, the supplier and the retailer should cooperatively determine the optimal entry time. This paper proposes a two-stage dynamic optimization model by using a real option approach and then performs the sensitivity analyses for the option value and the investment threshold. The impacts of some critical factors, including the growth rate and the volatility of demand shock, sunk cost, and relating operational costs (cost rates, fix costs, holding costs of inventory, and shipping costs), are investigated.