Risk Averse Members Coordination with Extended Buy-Back Contract
ABSTRACT
This paper considers how to coordinate a supply chain (SC) consisted of one supplier and one retailer who possess different risk aversion preference with a contract. Based on the classical buy-back contract, this paper presents an extended buy-back contract. In addition to the member’s objective of maximizing his expected profit, downside risk constraint is used to represent the SC member’s risk aversion preference. Under different risk aversion preference combination, the SC perfect solution existence conditions are identified and the specific contract is provided accordingly. This research finds out that, with a low risk aversion supplier and a high risk aversion retailer, the supplier as the SC coordinator can give the retailer incentive to increase the order quantity so as to reach SC perfect coordination. Finally a numerical analysis verifies the effectiveness of the extended buy-back contract.
This paper considers how to coordinate a supply chain (SC) consisted of one supplier and one retailer who possess different risk aversion preference with a contract. Based on the classical buy-back contract, this paper presents an extended buy-back contract. In addition to the member’s objective of maximizing his expected profit, downside risk constraint is used to represent the SC member’s risk aversion preference. Under different risk aversion preference combination, the SC perfect solution existence conditions are identified and the specific contract is provided accordingly. This research finds out that, with a low risk aversion supplier and a high risk aversion retailer, the supplier as the SC coordinator can give the retailer incentive to increase the order quantity so as to reach SC perfect coordination. Finally a numerical analysis verifies the effectiveness of the extended buy-back contract.
Cite this paper
nullZ. Qin and X. Xue, "Risk Averse Members Coordination with Extended Buy-Back Contract," Journal of Service Science and Management, Vol. 3 No. 1, 2010, pp. 23-32. doi: 10.4236/jssm.2010.31003.
nullZ. Qin and X. Xue, "Risk Averse Members Coordination with Extended Buy-Back Contract," Journal of Service Science and Management, Vol. 3 No. 1, 2010, pp. 23-32. doi: 10.4236/jssm.2010.31003.
References
[1] L. Eeckhoudt, C. Gollier, and H. Schlesinger, “The risk averse (prudent) newsboy,” Management Science, Vol. 41, No. 5, pp. 786–794, 1995. [2] V. Agrawal and S. Seshadri, “Impact of uncertainty and risk aversion on price and order quantity in the newsvendor problem,” Manufacturing & Service Operations Management, Vol. 2, No. 4, pp. 410–423, 2000. [3] H. S. Lau and A. H. L. Lau, “Manufacturer’s pricing strategy and returns policy for a single-period commodity,” European Journal of Operational Research, Vol. 116, No. 2, pp. 291–304, 1999. [4] X. Gan, S. Sethi, and H. Yan, “Channel coordination with a risk neutral supplier and a downside risk-averse retailer,” Production and Operations Management, Vol. 14, No. 1, pp. 80–89, 2005. [5] T. M. Choi, D. Li, and H. Yan, “Mean-variance analysis of a single supplier and retailer supply chain under a returns policy,” European Journal of Operational Research, Vol. 184, No. 1, pp. 356–376, 2008. [6] X. Gan, S. Sethi, and H. Yan, “Coordination of supply chain with risk-averse agents,” Production and Operations Management, Vol. 13, No. 2, pp. 135–149, 2004. [7] Y. Wei and T. M. Choi, “Mean-variance analysis of supply chains under wholesale pricing and profit sharing schemes,” European Journal of Operational Research, Vol. 204, No. 2, pp. 255–262, 2010. [8] K. Mastui, “Returns policy, new model introduction, and consumer welfare,” International Journal of Production Economics, in press 2009. [9] T. Xiao and T. M. Choi, “Purchasing choices and channel structure strategies for a two-echelon system with risk-averse players,” International Journal of Production Economics, Vol. 120, No. 1, pp. 54–65, 2009. [10] A. Charnes and W. W. Cooper, “Chance-constrained programming,” Management Science, Vol. 6, No. 1, pp. 73–79, 1959. [11] B. Pasternack, “Optimal pricing and returns policies for perishable commodities,” Marketing Science. Vol. 4, No. 2, pp. 166–176, 1985.
[1] L. Eeckhoudt, C. Gollier, and H. Schlesinger, “The risk averse (prudent) newsboy,” Management Science, Vol. 41, No. 5, pp. 786–794, 1995. [2] V. Agrawal and S. Seshadri, “Impact of uncertainty and risk aversion on price and order quantity in the newsvendor problem,” Manufacturing & Service Operations Management, Vol. 2, No. 4, pp. 410–423, 2000. [3] H. S. Lau and A. H. L. Lau, “Manufacturer’s pricing strategy and returns policy for a single-period commodity,” European Journal of Operational Research, Vol. 116, No. 2, pp. 291–304, 1999. [4] X. Gan, S. Sethi, and H. Yan, “Channel coordination with a risk neutral supplier and a downside risk-averse retailer,” Production and Operations Management, Vol. 14, No. 1, pp. 80–89, 2005. [5] T. M. Choi, D. Li, and H. Yan, “Mean-variance analysis of a single supplier and retailer supply chain under a returns policy,” European Journal of Operational Research, Vol. 184, No. 1, pp. 356–376, 2008. [6] X. Gan, S. Sethi, and H. Yan, “Coordination of supply chain with risk-averse agents,” Production and Operations Management, Vol. 13, No. 2, pp. 135–149, 2004. [7] Y. Wei and T. M. Choi, “Mean-variance analysis of supply chains under wholesale pricing and profit sharing schemes,” European Journal of Operational Research, Vol. 204, No. 2, pp. 255–262, 2010. [8] K. Mastui, “Returns policy, new model introduction, and consumer welfare,” International Journal of Production Economics, in press 2009. [9] T. Xiao and T. M. Choi, “Purchasing choices and channel structure strategies for a two-echelon system with risk-averse players,” International Journal of Production Economics, Vol. 120, No. 1, pp. 54–65, 2009. [10] A. Charnes and W. W. Cooper, “Chance-constrained programming,” Management Science, Vol. 6, No. 1, pp. 73–79, 1959. [11] B. Pasternack, “Optimal pricing and returns policies for perishable commodities,” Marketing Science. Vol. 4, No. 2, pp. 166–176, 1985.