Optimal order strategy for channels under different supply risk levels

Abstract

We consider an order problem for two channels consisting of one common retailer and two competing suppliers that are subject to supply uncertainty. A new concept of supply risk level (SRL) of a channel is proposed to quantitatively characterize the supply risk of the channel due to supply uncertainty. Under different SRLs, we study the order strategies for the two channels in integrated and decentralized supply chains. Regardless of whether the game is integrated or decentralized, we find that the different SRLs give rise to a difference between the belief-degree costs of the two channels that directly influences the optimal order strategy, market supply and profit of each channel. This implies that the decision maker of the supply chain can take different risk attitudes toward the supply uncertainty of the two channels to adjust the potential market supply and profit of each channel because the decision maker generally replaces the SRL with his or her risk preference. Under given SRLs, we find that integration is a better strategy than decentralization. However, the channel profit with a higher belief-degree cost under decentralization is greater than that under integration in some cases. Finally, proper risk preferences for both channels are suggested to strike a balance between supply reliability and supply risk.