Abstract
This study is the first to consider a distribution-free approach in a newsvendor model with a transfer of risk and back-ordering. Previously, in many articles, discrete demand is considered. In this model, we consider a newsvendor selling a single seasonal item with price-dependent stochastic demand. Competition in markets has forced the retailer and manufacturer to coordinate in decentralized supply chain management. A coordination contract is made between a retailer and manufacturer to overcome the randomness of demand for a short-life-cycle product. The retailer pays an additional amount per product to transfer the risk of unsold items. The manufacturer bears the cost of unsold products from the retailer. Shortages are allowed with back-ordering costs during the season. The distribution-free model is developed and solved with only available demand data of mean and standard deviation. Stackelberg’s game approach is used to calculate the optimal ordering quality and price. This model aims to maximize expected profit by optimizing unit selling price and ordered quantity through coordination. To illustrate that the model is robust, numerical experiment and sensitivity analyses are conducted for both decentralized and centralized supply chain management. For applicability of the model in the real-world business scenario, managerial insights are provided with sensitivity analysis.
Highlights
Recent advances in technology have accelerated product development
By introducing the real option contract, variance in the order could be reduced for the retailer, whereas in the traditional newsvendor model, all the risk is borne by the retailer
This paper studied the centralized and decentralized newsvendor model with transfer of risk and back-ordering
Summary
Recent advances in technology have accelerated product development. As soon as a new product comes to the market, the old product becomes obsolete. The newsvendor model has various applications in the volatile product market (Khouja [1]; Dai and Meng [2]). The inventory manager has to place the order before the selling season starts with a single opportunity and no additional replenishment opportunity in the season The product he is dealing with is of a nature that becomes obsolete rapidly. A real option contract is introduced to the newsvendor model for supply chain expected profit maximization. By introducing the real option contract, variance in the order could be reduced for the retailer, whereas in the traditional newsvendor model, all the risk is borne by the retailer. We apply the Stackelberg game approach in the decentralized supply chain, where the manufacturer and the retailer are considered two players. The retailer acts as a leader and the manufacturer as a follower
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