Prepositioning of relief supplies jointly by a risk-averse humanitarian organisation and risk-neutral suppliers through an option contract

Humanitarian organisations (HOs) depend heavily on option contracts (OCs) to manage the risks involved with relief supply prepositioning. In OCs, HOs often use expected payoffs to make risk-neutral decisions. The risk-neutral approach works best when the uncertain environment lacks catastrophic occurrences or the decision is frequently made under a similar environment. However, this approach may not be appropriate for prepositioning decisions in uncertain environments with catastrophic occurrences, which can have far-reaching effects. As such, this study examines a risk-averse HO teaming with various risk-neutral suppliers through OC to preposition relief supplies collectively to determine its optimal decision. The decisions follow a Stackelberg game between the HO and suppliers. We use the conditional value-at-risk (CVaR) measure and the expected profit to determine the prepositioning decisions of the HO and suppliers, respectively. We also assess the condition to coordinate the supply chain and analyse how the degree of HO's risk aversion affects stocking decisions. Furthermore, we compare the prepositioning quantity under OCs with that of a baseline model to identify the conditions under which OC is beneficial.