An Interactive Newsvendor Model Involving Market Risk and Product Quality Risk

Abstract

This paper presents an interactive profit sharing mechanism for a newsvendor supply chain problem considering both market demand uncertainty and product quality risk. The supplier decides wholesale price, and based on this price, the retailer responds with a market price and an order quantity that optimizes his expected total profit. It is assumed that the retailer fully understands how the market price influences the mean of the market demand distribution. The supplier earns his profit from the order quantity, but will bear the cost of defective products delivered to customers. On the other hand, the retailer bears market risks such as overage cost and shortage cost. To reduce the quality risk, the supplier will employ a Bayesian double sampling inspection plan to minimize product quality cost. An illustrative example is presented to describe the proposed model. Sensitivity analyses of the model parameters are also included.