Impact of Risk Aversion on Optimal Decisions in Supply Contracts with Bidirectional Options

Abstract:

Article Preview

Supply contracts with options have been proposed to provide flexibility in supply chains with high demand uncertainties. In this paper, we consider a flexible supply contract model with bidirectional options in which a risk-averse retailer subject to high uncertain market demand and ordering decisions. We use the Conditional Value-at-Risk, a risk measure commonly used in finance, as a decision criterion and derive the retailer's optimal ordering decisions equations. In particular, we obtain closed-form formulae to describe the retailer's optimal behavior when the demand is uniformly distributed. Numerical examples analyze that how the risk aversion and contract parameters affect the retailer's optimal decisions. We also numerically prove that bidirectional options improve the retailer's profit under risk aversions, compared with the wholesale price contract.

Info:

Periodical:

Edited by:

Yuning Zhong

Pages:

261-266

Citation:

L. L. Wang and R. Z. Wang, "Impact of Risk Aversion on Optimal Decisions in Supply Contracts with Bidirectional Options", Applied Mechanics and Materials, Vol. 235, pp. 261-266, 2012

Online since:

November 2012

Export:

Price:

$38.00

[1] Y. Bassok, R. Srinivasan, A. Bixby and H. Wiesel: IBM Journal of Research and Development, Vol. 41(1997).

[2] D. Farlow, G. Schmidt and A. Tsay, Case Study, (Graduate School of Business, Stanford University 1995).

[3] A. Tsay and W. Lovejoy: Manufacturing and Service Operations Management, Vol. 1(1999), p.08.

[4] F. Cheng, M. Ettl, G.Y. Lin, M. Schwarz and D.D. Yao: Flexible supply contracts via option (Yorktown Heights, USA 2003).

[5] Q. Wang and D. Tsao: International Journal of Production Economics, Vol. 101(2006), pp.30-52.

[6] D. Barnes-Schuster, Y. Bassok, and R. Anupindi: Manufacturing and Services Operations Management, Vol. 4(2002), p.171.

[7] L. Eeckhoudt, C. Gollier, and H. Schlesinger: Management Science, Vol. 4(1995), pp.786-794.

[8] H. Lau: Journal of the Operational Research Society, Vol. 31(1980), p.525.

[9] H. Markowitz: Efficient Diversification of Investments (Yale University Press, USA 1959).

[10] R.T. Rockafelar and S. Uryasev: Journal of Risk, Vol. 2(2000), p.21.

[11] R.T. Rockafelar and S. Uryasev: Journal of Banking and Finance, Vol. 26(2002), p.1443.