INTERACTION BETWEEN A MANUFACTURER AND A RISK-AVERSE RETAILER

A SUPPLY CHAIN PERSPECTIVE ON RISK-AVERSE NEWSVENDOR MODEL

Abstract

To share the risk and return between the supply chain partners is an important theme in supply chain management (SCM). There exists the extensive literature on the supply chain coordination, especially on the design of contracts that align the incentives of supply chain partners. However, few studies address the effect of risk attitude upon the coordination, and most of them are dealing with a risk-averse player within the context of a single player model. In order to coordinate supply chain, it is valuable to investigate how the risk attitudes of supply chain partners affect the supply chain relationships. In this paper, we consider the decentralized supply chain consisting of a risk-averse retailer and a manufacturer who are concerned with only their own objectives. The decentralized supply chain is facing an uncertain market demand and dealing with a single product over a single period. We show complex effects of risk aversion on the manufacturer-retailer interaction numerically. We also drive analytical results as much as possible. The risk models analyzed in this paper are the mean-variance (MV) model, the mean-standard deviation (MS) model, and the conditional value-at-risk (CVaR) model. We show that the dynamics of interaction is different depending on the risk measurement used in the analysis.