Abstract

This paper focused on the treatment of supply disruptions in the production and procurement systems. By treating inventory as real options, a contract portfolio can be generated to hedge the supply disruptions with minimal costs. This paper proposed a collaborative production-procurement system with contract portfolio approach to smooth supply disruptions incurred from supply chain. The collaborative production-procurement system provided a strategic flexibility and adopted for a real-life production-procurement problem which was faced by a food processing industry in Asia and turns out to be very efficient. The proposed contract portfolio approach has provided evidence of better results than the traditional operational techniques in this paper.

Key words: Supply disruption, contract portfolio approach, real option.