Emergency supplies prepositioning via a government-led supply chain with a loss-averse supplier with anchoring

Abstract

This paper investigates how to strategically stock and procure disaster supplies to respond to large-scale disasters under government-private framework agreements. We first consider a humanitarian supply chain (HSC) comprised of a humanitarian agency and a loss-averse supplier with anchoring. The agency buys a certain quantity of emergency supplies as regular stocks and simultaneously orders physical options through an option contract before major disasters occur. The supplier determines how many physical emergency products are produced as additional stocks. With backward derivation, the optimal decisions of regular stocks and additional stocks are characterized, respectively. Furthermore, several conditions under which the HSC could achieve coordination are tightly related to the option and exercise prices as well as the supplier’s levels of loss aversion and optimism. Interestingly, either over-ordering and under-stocking or under-ordering and over-stocking would occur, depending on whether the loss aversion effect dominates the anchoring effect. As the level of loss aversion increases, both the utility and profit of the supplier decrease. Moreover, even if the supplier is loss-averse, there is a Pareto option contract mechanism that benefits both parties when compared to the government-managed model. Finally, several numerical experiments are carried out, and some managerial insights based on different disaster scenarios are presented.