Research On Two-Echelon Supply Chain Coordination With The Risk-Averse Agents

Nowadays the supply chains got globalized gradually and competitive fiercely. The objectiveof the member in supply chain can be aligned by supply contracts because of common interests. Butfor the agents they have to pay attention to both the profits and the risk of the profit with the demanduncertainty. There are numerous literatures and research results on the conventional quantitativemodel in case of the risk neutrality. But actually most of the decisions are risk-averse. Therefore it issignificant to assume the supply chain agents of being risk-averse.The essence of the agents' decision in supply chain is some investment on the futureuncertainty. In view of this volumes of research results on the investment theory are beingintroduced into the optimal decision in the supply chain. Based on the importance of thecoordination in supply chain and the fact of risk-averse agents this paper applies risk decision in themodel of supply chain coordination, compares the distinct impacts of supply chain coordinationbetween the risk neutrality and the risk aversion, explore the different property of the supply chainin the assumption of risk aversion. Then taking the forward contracts, option contracts and portfoliocontracts with the function of hedging risk in the supply chain with spot markets as research objectthe author contrasts those contracts with the coordination effects. Through the twofold research helays the foundation of establishing the model which takes into account both risk-averse agents andthe supply chain coordination. Finally he constructs the model by establishing hedging portfolioswith financial hedging instruments. So he achieves the research objective, which is the considerationon not only supply chain coordination but also the risk-averse agents.The major research contents and results can be summarized as follows:1) Based on buyback contracts used widely, he discusses the optimum decision of the supplier orretailer in the assumption of different risk constraints. After the definition of the riskconstraint coefficient he gives the optimum decisions on three cases. Case1: One side isrestricted risk-coefficient, the other side is non-restricted risk-coefficient; Case2: Both sidesare restricted risk-coefficient, but the supply chain can still be coordinated; Case3: Bothsides are restricted risk-coefficient, and the supply chain cannot still be coordinated. In turnhe gives the optimum decisions in the assumption of asymmetric information about the riskattitude. The research results show that in case of risk-averse agents the decentralized supplychain is easier to spread the risk than the centralized supply chain, the feasible set of optimumdecision will reduce if the decision maker is risk-averse so that it is advantageous to obtainnegotiating solutions, the asymmetric information on agents' risk attitude will bringinformation cost.2) Based on Prospect Theory he constructs expected utility function taking account of not only the surplus loss aversion but also the shortage loss aversion. Comparing optimum decisionbetween risk-averse agents and risk-neutral agents, between buyback contracts and optioncontracts the model shows: given the risk-averse agents the centralized supply chain is notcertainly advantageous to the decentralized supply chain; the adjustable ordering contractshave more advantages than the nonadjustable ordering contracts in asymmetric information,that is to say, the supplier decision on the price need not watch out the retailer's risk attitude.3) Based on the newsvendor model with spot market he examines the coordination on three supplychain contracts which are respectively the forward contracts, the option contracts and theportfolio contracts. These contracts can hedge the risk. This paper gives the supplier and themanufacturer the optimum decisions and compares the system profits with the centralizedsupply chain and the decentralized supply chain without contracts. The results explain that thesingle forward contracts or option contracts cannot coordinate the supply chain, but theportfolio contracts can coordinate the supply chain. The portfolio contracts consist of theforward contracts and the option contracts.4) Assuming that the future demands are positive related with some market index, the paperanalyses the risk characteristic of the wholesale price contracts, buyback contracts, revenuecontracts, option contracts, and quantity flexible contracts and give them the appropriaterisk-hedging. The method of risk measure is the conditional value at risk (CVaR). The optimummethod is to minimize the conditional value at risk. According to that means he constructshedging portfolios. At last he inspects the coordination of the wholesale price contracts withfinancial hedging instruments. In risk-neutrality world the wholesale price contracts cannotcoordinate the supply chain. The research shows that the optimum hedging quantity ofcoordinated supply contracts is less than the wholesale price contracts; the wholesale pricecontracts with financial hedging instruments can coordinate the supply chain.By the above research and the related results he finds that in the assumption of risk aversionthe supply chain shows distinct property with the risk neutrality world. For the risk-averse agentsin order to coordinate the supply chain it is significant to apply the hedging instruments, whetherthe hedging instruments are the financial instruments or the operational hedging.