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Transfer of newsvendor inventory and supply risks to sub-industry and the public by financial instruments

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  • Hung, Yick-Hin
  • Li, Leon Y.O.
  • Cheng, T.C.E.

Abstract

We consider a two-stage newsvendor model of a sub-industry in which suppliers have short lead-time capacity to produce goods for retailers that are selling non-identical products. We argue that the inventory and supply risks of the newsvendors due to demand uncertainty can be pooled and shared among different supply chains by treating reserved capacity as commodities and trading them as futures and options on futures to hedge the risks. The risks will be further shared with and transferred to the public if speculators are allowed to play the game. We show that this new mechanism of combining operational and financial risk hedging strategies offers industries a new way to more efficiently meet demand and improve profit.

Suggested Citation

  • Hung, Yick-Hin & Li, Leon Y.O. & Cheng, T.C.E., 2013. "Transfer of newsvendor inventory and supply risks to sub-industry and the public by financial instruments," International Journal of Production Economics, Elsevier, vol. 143(2), pages 567-573.
    • Handle: RePEc:eee:proeco:v:143:y:2013:i:2:p:567-573
    DOI: 10.1016/j.ijpe.2011.10.019
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    References listed on IDEAS

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    Cited by:

    1. Jian Ni & Lap Keung Chu & Shoude Li, 2018. "Financial hedging and competitive strategy for value-maximizing firms under quantity competition," Annals of Operations Research, Springer, vol. 264(1), pages 391-407, May.
    2. Wen, Xin & Choi, Tsan-Ming & Chung, Sai-Ho, 2019. "Fashion retail supply chain management: A review of operational models," International Journal of Production Economics, Elsevier, vol. 207(C), pages 34-55.
    3. Rufeng Wang & Xiongwei Zhou & Bo Li, 2022. "Pricing strategy of dual-channel supply chain with a risk-averse retailer considering consumers’ channel preferences," Annals of Operations Research, Springer, vol. 309(1), pages 305-324, February.
    4. Jain, Tarun & Hazra, Jishnu, 2017. "Sourcing strategies under agglomeration economies, capacity risks and retail competition," International Journal of Production Economics, Elsevier, vol. 191(C), pages 311-322.
    5. Zhen Zhang & Songtao Zhang & Mingshi Yue, 2021. "Joint pricing and replenishment policies for risk‐averse retailers under duopolistic competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1849-1864, October.
    6. Chun-Hung Chiu & Tsan-Ming Choi, 2016. "Supply chain risk analysis with mean-variance models: a technical review," Annals of Operations Research, Springer, vol. 240(2), pages 489-507, May.

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