Supply Chain Coordination with a Risk-Averse Retailer and the Call Option Contract in the Presence of a Service Requirement

Han Zhao, Hui Wang, Wei Liu, Shiji Song and Yu Liao
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Han Zhao: Department of Finance and Audit, Army Logistics Academy, Chongqing 401311, China
Hui Wang: Department of Finance and Audit, Army Logistics Academy, Chongqing 401311, China
Wei Liu: Department of Basic Science, Wuhan Donghu University, Wuhan 430212, China
Shiji Song: Department of Automation, Tsinghua University, Beijing 100084, China
Yu Liao: Department of Basic Science, Army Logistics University, Chongqing 401311, China

Mathematics, 2021, vol. 9, issue 7, 1-19

Abstract: This paper investigates a supply chain consisting of a single risk-neutral supplier and a single risk-averse retailer with the call option contract and a service requirement, where the retailer’s objective is to maximize the Conditional Value-at-Risk about profit. The optimal ordering quantity of the retailer and the optimal production quantity of the supplier are derived with the call option contract in the presence of a service requirement. Furthermore, by investigating the effect of the service level and the risk aversion on the supply chain, it is found that the retailer’s optimal Conditional Value-at-Risk is non-increasing in the service requirement and increasing in the risk aversion, while the supplier’s optimal expected profit is non-decreasing in the service and decreasing in the risk aversion. In addition, this paper demonstrates the impact of contract parameters on the service-constrained supply chain, and finds that the retailer’s optimal Conditional Value-at-Risk may be increasing, constant or decreasing in unit exercise price. Finally, with the call option contract, a distribution-free coordination condition is derived to achieve the Pareto improvement under Conditional Value-at-Risk criterion in the presence of a service requirement.

Keywords: supply chain coordination; conditional value-at-risk; service requirement; call option contract (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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