An Emergency Supplies Procurement Strategy Based On A Bidirectional Option Contract Under Risk Aversion

The key to emergency response is the support of emergency supplies.Emergency supplies procurement is an important part of emergency supplies management and determines whether the subsequent supply can be executed smoothly.The uncertainty of disasters makes it difficult for governments to predict accurate demand for emergency supplies,thus complicating emergency supplies procurement decisions.On the one hand,if the demand for emergency supplies is high,the supplies procured and stockpiled before the disaster may not be sufficient to meet the full demand.Such shortages could seriously hamper emergency response and even cause significant losses.On the other hand,due to the high uncertainty of demand for emergency supplies and the fixed shelf life of reserved supplies,pre-purchasing and stockpiling supplies in large quantities is quite likely to result in a waste of resources and idleness of assets.Consequently,governments are faced with the dilemma of the coexistence of shortage and surplus risks in the procurement and stockpiling of emergency supplies.The work systematically analysed the research related to emergency supplies procurement and found some limitations and challenges in the practical application of existing research findings,including ignoring the humanitarian objectives and risk-averse attitudes of emergency supplies purchasers,managing only one of the shortage and surplus risks,and having difficulties in the choice of procurement strategies for decision-makers.Based on the practical problems faced by emergency supplies procurement and the limitations of relevant theoretical research,this study designed an emergency supplies procurement strategy based on a bidirectional option contract,with the main work including the following:(i)This study designed a bidirectional option contract-based procurement strategy for emergency supplies and constructed the corresponding procurement decision model taking into account the humanitarian objective and risk-averse attitude of the purchaser(the government),derived an analytical solution for the optimal procurement decision,and analysed the influence of contract parameters and risk attitude on the procurement decision.Specifically,this study(a)introduced a "demand satisfaction value" term into the profit function of the purchaser to measure the social value generated by satisfying the demand for emergency supplies,so as to reflect the pursuit of humanitarian goals in the purchaser’s decision-making;(b)selected an appropriate risk measurement criterion,and constructed a bidirectional option contract-based emergency supplies procurement model considering the purchaser’s risk-averse attitude,economic costs,and humanitarian objective;and(c)compared the model with a benchmark procurement model where the purchaser is risk neutral and seeks to maximise its expected profit to demonstrate the impact of the purchaser’s risk attitude on the procurement decision,the expected profits of the purchaser and the supplier,etc.(ii)This study explored the problem of relief supply chain coordination based on a bidirectional option contract when the purchaser is risk averse,found the conditions for channel coordination under the bidirectional option contract,and analysed the nature of the procurement model under the coordinated state.Specifically,this study(a)developed a procurement model for emergency supplies under centralised decision-making and calculated the optimal order quantity for the centralised relief supply chain;(b)identified the definition of supply chain coordination when considering the risk attitudes of supply chain members,and based on this,derived the conditions that must be met for coordinating a relief supply chain with a risk averse purchaser whose goal is to minimise its conditional value of risk through a bidirectional option contract,and illustrated the impact of the risk-aversion of the purchaser on the likelihood of achieving channel coordination;and(c)validated the theoretical results and explored the effect of the parameters on the model results in a coordinated state with a numerical example.(iii)This study verified the effectiveness and feasibility of the procurement strategy for emergency supplies based on a bidirectional option contract when the purchaser is risk averse.Specifically,this study(a)developed a procurement optimisation model without the use of a bidirectional option contract where the purchaser is risk averse and seeks to minimise its conditional value at risk,using the results of this model as the benchmark for comparison;and(b)combined theoretical derivations and computational examples to demonstrate the optimisation effect of using a bidirectional option contract for emergency supplies procurement management in terms of procurement flexibility,the expected profit of the purchaser,the conditional value at risk of the purchaser,and the overall expected profit of the relief supply chain,and further demonstrated that a bidirectional option contract purchasing strategy is a way to achieve Pareto improvement based on the expected profit of the supplier.(iv)This study compared the bidirectional option contract procurement strategy with two unilateral option contract procurement strategies,analysed the differences between the three option contracts from the perspective of inverse comparison,and clarified the application advantages of the bidirectional option contract in the procurement management of emergency supplies.Specifically,this study(a)constructed a call option contract procurement model and a put option contract procurement model where the purchaser is risk averse,and derived the analytical solutions for the optimal procurement decisions under the two unilateral option contracts respectively;and(b)adopted a reverse comparison approach to analyse the similarities and differences between the emergency supplies procurement strategies based on bidirectional option contracts and those based on unilateral option contracts in terms of the regulation mechanism,regulation capacity,and capacity requirements of the participants,and concluded the advantages of the former in practical application.In conclusion,this study proposed an emergency supplies procurement strategy based on a bidirectional option contract and took into account the influence of the risk-averse attitude of the purchaser in the model.The results show that:(ⅰ)The risk attitude of the purchaser affects its decision objective and thus the decision results;moreover,the degree of the purchaser’s risk aversion is also linked to whether the relief supply chain can be coordinated under a bidirectional option contract,i.e.only when the parameter is less than a certain threshold can the supply chain be coordinated by adjusting the parameters of the bidirectional option contract.(ⅱ)The bidirectional option contract procurement strategy can help resolve the shortage and surplus risks in the procurement and stockpiling process of emergency supplies,improve the overall efficiency of the relief supply chain,and achieve a win-win situation for both the purchaser and the supplier,which is suitable for building a long-term and stable governmententerprise cooperation relationship.