“Strategic Value of Bundled Options for Managing Breach of Contract Risk”
In this talk, my main objective is to demonstrate the strategic value of bundled options in supply chain contracts for managing breach of contract risk. We design and value a bundled option that is composed of contract abandonment and price renegotiation. We show that the bundled option is more valuable for the contract than either of the options, i.e., contract abandonment and price renegotiation, in isolation. The value of the bundled option is less than the sum of the individual option values, hence showing the sub-additive property. We demonstrate that in the presence of high spot price volatility, the bundled option is more valuable when renegotiation date is selected to be closer to the half-life of the contract. We further show that early contract abandonment probability goes down in the presence of renegotiation option. We conclude that a commodity supplier should negotiate a supply chain contract with flexible options at the design stage with a buyer, obtaining contract abandonment and price renegotiation options –as a bundled option—in order to enhance the value of the supply chain contract and manage the breach of contract risk intelligently.
Joint work with: Koray Şimşek, Sabancı School of Management
Professor Haksöz is a faculty member of Operations and Supply Chain Management at Sabancı School of Management, Sabancı University, İstanbul, Turkey. He is an affiliate member of the Regent’s Centre for Transnational Studies, Regent’s College, London, UK. He is also the co-director of the MIT-Sabancı University Energy Security Initiative (MSESI). His current research focuses on supply chain risk management, risk intelligence, managing supply chain networks on the Silk Road, supply chain and energy contract management, product recall risk management and climate change/weather risk. He has published two books, namely Managing Supply Chains on the Silk Road: Strategy, Performance, and Risk (with S. Seshadri and A. V. Iyer, 2011) and Global Perspectives: Turkey (with M. Çakanyıldırım, 2012). His publications appeared in Operations Research, Mathematics of Operations Research, MIT Sloan Management Review, The Journal of Operational Risk, The Journal of the Operational Research Society, and International Journal of Production Research, as well as The Wall Street Journal, The Financial Times, among others. He serves as the Area Editor (Operations) for the International Journal of Emerging Markets as well as the Associate Editor of Transnational Marketing Journal. Before joining Sabancı University, Professor Haksöz taught at New York University, Stern School of Business, Cass Business School, City University of London, UK, and New York University in London. Between 2008-2011, he was an honorary visiting fellow at Cass Business School, City University of London, UK. He also guest lectured at Poznań School of Logistics, Poznań, Poland. Professor Haksöz provides executive teaching and also consults national/international firms and government organizations. He holds a PhD and MPhil in Operations Management from New York University, Stern School of Business and BSc in Industrial Engineering from Bilkent University, Turkey.