An Analysis On The Transmission Of Demand Risk And Exchange Rate Risk In Supply Chains

Focusing on the defects in the literature, we build a two-stage game modelwhere a retailer, a manufacturer and a supplier trade via the wholesale pricecontracts under the condition of decentralized decision-making. With the modelequilibrium, we study how demand risk and exchange rate risk are transmitted inthe supply chain。First of all, we discuss how the demand risk and exchange raterisk affect the supply chain members’ expected profit and profit variance, andthe question of risk bearing between the supply chain members. Further, we alsouse the profit variance per expected profit (PVEP) to represent the degree towhich supply chain members bear risk and then discuss how demand risk andexchange rate risk influence the PVEPs. Finally, from the perspective of arisk-averse investor, based on the mean-variance model, we discuss how arisk-averse investor evaluates the supply chain members.The results show that (1) the expected profit of the retailer, the manufacturer andthe supplier increases in the variance of the final demand and the variance of theexchange rate;(2) the profit variance of node enterprises increases in thevariance of the final demand and the variance of the exchange rate;(3) therelative risk bearing between the retailer and the manufacturer (measured theratio of the retailer’s profit variance to the manufacturer’s profit variance)increases in the slope of the market demand function while the relative riskbearing between the supplier and the manufacturer (measured the ratio of thesupplier’s profit variance to the manufacturer’s profit variance) increases in theslope of the supplier’s margin cost function.(4) the manufacturer’s PVEP is thehighest one among supply chain members, whereas the retailer’s PVEP is higher(lower) than the supplier’s when the degree of the retailer’s response flexibilityis low (high) enough relative to that of the supplier;(5) the PVEPs of nodeenterprises increase in the variance of the market demand and the variance ofthe exchange rate;(6) the utility per expected profit (UEP) of the manufactureris the lowest one among supply chain members, whereas the retailer’s UEP is lower (higher) than the supplier’s when the degree of the retailer’s responseflexibility is low (high) enough relative to that of the supplier.To summarize, there results theoretically reveal that (1) the demand risk andthe exchange rate risk can be transmitted in a supply chain via the members’strategic interactions;(2) the risk transmission in a supply chain depends onboth the bullwhip effect and the members’ profit margins;(3) the PVEPs of nodeenterprises are negatively related to the risk-averse investor’s evaluationsrespectively: a firm’s higher UEP correspond to its lower PVEP.