Abstract: Raw material price fluctuation can induce the seller or the buyer to face the potential risk in the future transactions. In order to reduce the risk, the firms usually use price contracts to make them share the risk of the raw material price fluctuation. In this paper, a supply chain is considered consist of a supplier and a retailer, where the retailer buys the raw material from the supplier at the beginning of the lead time and the supplier delivers the raw material to the retailer some time later. A price flexibility contract is designed to share the profit risk between the supplier and the retailer. Using Stackelberg game the paper built mathematic model to optimize the procurement risk-sharing mechanism and provided the optimal parameters for the flexible supply contract. The results show that supply contract with proper parameters can improve the profit of the supplier and the retailer respectively. By analyzing the profit variance. It is also found that the optimal flexible supply contract can reduce the profit risk of the supplier and the retailer significantly.

Key words: procurement management, price flexibility contract, Stackelberg game, risk-sharing