Title: Collaboration and sharing in a retailer-led supply chain with yield uncertainty and loss aversion

Authors: Bin Chen; Wenying Xie; Fuyou Huang; Juan He

Addresses: Institute of Transportation Development Strategy & Planning of Sichuan Province, Chengdu 610041, China ' School of Transportation and Logistics, Southwest Jiaotong University, Chengdu 610036, China ' Institute of Transportation Development Strategy & Planning of Sichuan Province, Chengdu 610041, China ' School of Transportation and Logistics, Southwest Jiaotong University, Chengdu 610036, China

Abstract: This paper addresses a retailer-led supply chain in which a loss-averse supplier subject to yield uncertainty sells products to a risk-neutral retailer facing stochastic demand. An option contract is introduced to develop collaboration and sharing models to improve channel performance and achieve supply chain coordination. We derive the closed-form solution for the optimal production policy, and show that option contract is a viable alternative to effectively mitigate the serious conflicts between the dominant retailer and the supplier, which leads to a win-win situation. We analyse how the loss-averse behaviour of the supplier affects the production strategy and contract design. Also, we discuss how to share profit between the retailer and the supplier to achieve Pareto-improvement. In addition, we examine the role of option contract for achieving channel coordination and Pareto-improvement under loss aversion and single-side uncertainty. [Received: 5 November 2019; Accepted: 31 May 2020]

Keywords: supply chain coordination; Pareto-improvement; option contract; yield uncertainty; loss aversion.

DOI: 10.1504/EJIE.2021.115174

European Journal of Industrial Engineering, 2021 Vol.15 No.3, pp.381 - 404

Received: 05 Nov 2019
Accepted: 31 May 2020

Published online: 30 Apr 2021 *

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