Coordinating Supply Chain with Buy-Back Contracts in the Presence of Risk Aversion

Abstract

This paper addresses the operational decisions and coordination of the supply chain in the presence of risk aversion, where the risk averse retailer’s performance is measured by a combination of the expected profit and conditional value-at-risk (CVaR). Such performance measure reflects the desire of the retailer to maximize the expected profit on one hand and to control the downside risk of the profit on the other hand. The impact of risk aversion on the supply chain’s decision and performance is also explored. To overcome the inefficiency due to the double marginalization and the aggravation resulting from risk aversion, we investigate the buy-back contract to coordinate the supply chain. Such contract can largely increase the supply chain’s profit, especially when the retailer is more risk averse. Lastly, we extend such risk measure to the widely-used business model nowadays — platform selling model, and explore the impact of the allocation rule on the manufacturer’s decision.