Buy-back Contract In Supply Chains With Single Risk-neutral Members And Multiple Loss-averse Members

With the continuous improvement of people’s hierarchy of needs, this requires upgrading of products to keep up with the pace of the demand increase. This lead to shorter product life cycles and the uncertainty demand. In such an environment, companies’ ordering of raw materials is faced with a typical newsboy problem. Business inventories are also faced with increasingly difficult decisions. In the case of uncertain demand, we can solve this problem through the use of appropriate coordination mechanisms to coordinate the supply chain system. When people make decentralized decision, supply chain systems can achieve optimal.In addition, the traditional supply chain coordination mechanism, often considered the participants are risk neutral. It has a certain departure from the reality of supply chain participants, so the loss of supply chain participants’ aversion characteristics into account is necessary.In this paper, we use mathematical modeling methods. Based on prospect theory, we characterize loss aversion characteristics of participants in the supply chain the system. And we assume that retailers face normally distributed random demand. By using Buy-back contract coordinate the supply chain system; this paper analyzes two kinds of the supply chain risk combination:(1) loss-averse retailers- risk-neutral suppliers;(2) loss-averse supplier- risk-neutral retailer. The main contents of this paper are:First, we analyze a single vendor- a single retailer supply chain system under different combinations of risk by using Buy-back contract. We find that a retailer can show their attitude towards risk by ordering volume and sales price, and the supplier shows its attitude towards risk by wholesale prices. And, in different combination of risk scenarios, Buyback contract can coordinate the supply chain system.Secondly, on the basis of the above analysis, we analyze a single vendor- multiple loss-averse retailers, and single retailer- multiple loss-averse supplier of supply chain system. When we use Buyback contract, we can see the coordination process and examples analysis. The case studies find that the loss aversion characteristics of participants in the supply chain have some correlation with other parameters.