The Coordination of Risk-averse Retailer's Supply Chain under the Option Contract

Abstract

In this paper we consider the coordination problem of a two-echelon supply chain with a risk-neutral supplier and a risk-averse retailer. Using the weighted average of conditional value-at-risk and expected profit as the utility function of risk-averse retailer, we establish the decentralized decision model and the centralized decision model under the option contract, and obtain the optimal ordering strategy for the retailer and the supply chain system. We show that the utility of the retailer and the supply chain system can be maximized at the same time, and the supply chain can be coordinated, when the option contract parameters satisfy certain conditions. Finally, the theoretical results are verified by numerical examples.