Abstract
This paper investigates a supply chain consisting of a single risk-neutral supplier and a single risk-averse retailer with the call option contract and a service requirement, where the retailer’s objective is to maximize the Conditional Value-at-Risk about profit. The optimal ordering quantity of the retailer and the optimal production quantity of the supplier are derived with the call option contract in the presence of a service requirement. Furthermore, by investigating the effect of the service level and the risk aversion on the supply chain, it is found that the retailer’s optimal Conditional Value-at-Risk is non-increasing in the service requirement and increasing in the risk aversion, while the supplier’s optimal expected profit is non-decreasing in the service and decreasing in the risk aversion. In addition, this paper demonstrates the impact of contract parameters on the service-constrained supply chain, and finds that the retailer’s optimal Conditional Value-at-Risk may be increasing, constant or decreasing in unit exercise price. Finally, with the call option contract, a distribution-free coordination condition is derived to achieve the Pareto improvement under Conditional Value-at-Risk criterion in the presence of a service requirement.
Highlights
Today’s global market environment is full of uncertainties, coupled with hastened technology advancement and speedy changing consumer preferences
This paper investigates a supply chain consisting of a single risk-neutral supplier and a single risk-averse retailer, where the retailer’s objective is to maximize the Conditional Value-at-Risk (CVaR) about profit
This paper finds that the service requirement and risk aversion promotes the firms to rethink operational decisions
Summary
Today’s global market environment is full of uncertainties, coupled with hastened technology advancement and speedy changing consumer preferences. To hedge against the loss associated with high understock and overstock risks, downstream firms have to order less but more frequently to accommodate demand volatility (e.g., [2,3]), and upstream firms need to have flexible capacity to cater for the irregular orders, which results in a sharp increase in supply cost [4]. To fill this research gap, this paper jointly considers risk aversion and risk management, and investigates the one risk-neutral supplier and one risk-averse retailer supply chain with the call option contract and a service requirement. (1) How does the risk-averse retailer determine the order quantity to maximize CVaR about profit in a supply chain with the call option contract in the presence of a service requirement?. (3) How do risk aversion, service requirement and contract parameters affect the retailer’s optimal order policy, the supplier’s optimal production policy and supply chain performance?.
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