Push, Pull, and Supply Chain Risk Averse Attitude

Abstract

The literature has shown that supply chain performance is affected by the allocation of inventory risk. Conventionally, a pull supply chain generates a higher optimal order quantity and hence higher supply chain profit than a push supply chain when firms are risk neutral. Extended from the classic push and pull newsvendor models, this paper investigates the impact of firms’ risk averse attitudes on supply chain performance. Based on firms’ Conditional Value-at-Risk (CVaR), our analysis indicates that the conventional wisdom no longer holds, in that push can lead to a higher optimal order quantity than pull when the supplier is sufficiently more risk averse than the retailer. Meanwhile, pull contracts cannot always survive push challenge like in risk-neutral supply chains. We demonstrate that three-part tariff revenue sharing or buy-back contracts can coordinate both the push and the pull supply chains to achieve the Pareto optimality maximizing combined supply chain CVaR; however, because risk attitude distorts the supply chain optimal ordering, risk correction is needed as long as the supply chain risk attitude is not neutral.