Supply Chain Coordination Models with Retailer's Attitudes Toward Risk

Summary Supply Chain Management (SCM) to effectively integrate various facilities and partners, such as suppliers, manufacturers, distributors, and retailers is the key to yield the competitive advantage for the companies. Nowadays, integrated supply chain management is possible due to advances in information technology. Despite these advances, it is still difficult to achieve the best supply chain performance without the coordination among members of a supply chain, because different facilities and partners in the supply chain may have different, conicting objectives (see for instance [4]). We consider a two level supply chain model in a newsvendor‘s problem. First, we shall show a property on the supplier‘s share of the supply chain‘s expected profit in a buyback contract where the retailer is riskneutral. Second, we discuss the effect of the attitudes toward risk of the retailer on the coordination in a supply chain. Most of the previous literature assume the retailer is risk-neutral. But recent studies indicate that the risk-averse approach in SCM plays a very crucial role in achieving a better supply chain performance. For example, Wang et al.[5] studied about the risk-averse newsvendor order at a higher selling price. Zhang et al. [7] analyzed the supply chain coordination of loss-averse newsvendor with contract. Keren and Pliskin [2] studied a benchmark solution for the newsvendor problem where the retailer is risk-averse, in which the demand distribution is uniformly distributed. We study this problem in a more general setting; using the utility functions representing the retailer‘s preferences, the optimal order quantity placed by a risk-averse retailer is compared with that of a risk-neutral retailer under the wholesale price contract and the buyback contract respectively.We also derive interesting properties between the retailer‘s order quantity and the Pratt‘s risk aversion function in the wholesale price contract and the buyback contract in a special case where both the demand function and the retailer‘s utility function are exponential.