Loss Aversion Order Strategy in Emergency Procurement during the COVID-19 Pandemic

Abstract

The COVID-19 pandemic has had a serious impact on firms’ sourcing strategies. Since COVID-19 disrupted the supply chain, firms have had to make emergency purchases from other suppliers. In addition, emergency ordering is one of the most effective strategies to achieve sustainable operations because such a strategy can save inventory costs. We aim to address a retailer’s emergency procurement strategies during the COVID-19 pandemic. We use prospect theory and the newsvendor model to uncover the retailer’s inventory decisions. In our study, we find that retailers have the choice to order items before the selling period at the normal purchase price, and, if available, they can order them before the end of the selling period at the urgent purchase price. We perform a comparison of the optimal ordering policy and margins in this case with the conventional and loss aversion models. The influence of emergency procurement on the optimal order policy and margins is investigated as well. This paper contributes in theory that we innovatively capture the uncertainty of emergency sourcing, which is a feature that has never been considered in current research.