Reordering policy and coordination of a supply chain with a loss-averse retailer

Kebing Chen; Tiaojun Xiao

doi:10.3934/jimo.2013.9.827

Article Contents

2013, Volume 9, Issue 4: 827-853. Doi: 10.3934/jimo.2013.9.827

This issue Previous Article Optimal capacity reservation policy on innovative product Next Article Two-warehouse inventory models for deteriorating products with ramp type demand rate

Reordering policy and coordination of a supply chain with a loss-averse retailer

Kebing Chen^1, and
Tiaojun Xiao^2,

1.
Department of Mathematics, Nanjing University of Aeronautics and Astronautics, Nanjing, Jiangsu 211100
2.
School of Management Science and Engineering, Nanjing University, Hankou Road 22, Nanjing, Jiangsu 210093

Received: December 2011

Revised: February 2013

Published: October 2013

Abstract Related Papers Cited by

Abstract

This paper develops three (re)ordering models of a supply chain consisting of one risk-neutral manufacturer and one loss-averse retailer to study the coordination mechanism and the effects of the reordering policy on the coordination mechanism. The three (re)ordering policies are twice ordering policy with break-even quantity, twice ordering policy without break-even quantity and once ordering policy, respectively. We design a buyback-setup-cost-sharing mechanism to coordinate the supply chain for each policy, and Pareto analysis indicates that both the manufacturer and the retailer will realize a 'win-win' situation. By comparing the models, we find that twice ordering policy with break-even quantity is absolutely dominant for both the retailer and the supply chain. However, only if the break-even quantity is less than the mean quantity to failure, twice ordering policy without break-even quantity is dominant over the once ordering policy. The higher marginal revenue can induce more order quantity of the retailer under both twice ordering policy with break-even quantity and once ordering policy. However, it is interesting that it has no effect on the order plan of centralized decision-maker in twice ordering policy without break-even quantity.

Keywords:

Mathematics Subject Classification: Primary: 90B50, 91B06; Secondary: 91A10.

Citation:

Related Papers

Cited by

References

[1]	R. Anupindi, Supply contracts with quantity commitments and stochastic demand, in "Quantitative Models for Supply Chain Management" (eds. S. Tayur, R. Ganeshan, and M. Magazine), Kluwer Academic, Boston, (1999), 199-232.doi: 10.1007/978-1-4615-4949-9_7.
[2]	F. Bernstein and A. Federgruen, Pricing and replenishment strategies in a distribution system with competing retailers, Operations Research, 51 (2003), 409-426.doi: 10.1287/opre.51.3.409.14957.
[3]	G. P. Cachon and M. A. Lariviere, Supply chain coordination with revenue sharing contracts: Strengths and limitations, Management Science, 51 (2005), 30-44.doi: 10.1287/mnsc.1040.0215.
[4]	G. P. Cachon, Supply chain coordination with contracts, Handbook in Operation Research and Management Science, 11 (2003), 227-339.doi: 10.1016/S0927-0507(03)11006-7.
[5]	F. R. Chen, Coordination mechanisms for a distribution system with one supplier and multiple retailers, Management Science, 47 (2001), 698-708.doi: 10.1287/mnsc.47.5.693.10484.
[6]	J. Chen and P. Bell, Coordinating a decentralized supply chain with customer returns and price-dependent stochastic demand using a buyback policy, European Journal of Operational Research, 212 (2011), 293-300.doi: 10.1016/j.ejor.2011.01.036.
[7]	J. Chen, L. Guan and X. Q. Cai, Analysis on Buyers' cooperative strategy under group-buying price mechanism, Journal of Industrial and Management Optimization, 9 (2013), 291-304.doi: 10.3934/jimo.2013.9.291.
[8]	K. B. Chen and T. J. Xiao, Demand disruption and coordination of the supply chain with a dominant retailer, European Journal of Operational Research, 197 (2009), 225-234.doi: 10.1016/j.ejor.2008.06.006.
[9]	K. B. Chen and T. J. Xiao, Ordering policy and coordination of a supply chain with two-period demand uncertainty, European Journal of Operational Research, 215 (2011), 347-357.doi: 10.1016/j.ejor.2011.06.015.
[10]	C. H. Chiu, T. M. Choi and X. Li, Supply chain coordination with risk sensitive retailer under target sales rebate, Automatica, 47 (2011), 1617-1625.doi: 10.1016/j.automatica.2011.04.012.
[11]	T. M. Choi, D. Li and H. M. Yan, Optimal returns policy for supply chain with e-marketplace, International Journal of Production Economics, 88 (2004), 205-227.doi: 10.1016/S0925-5273(03)00188-9.
[12]	P. Dutta, D. Chakraborty and A. R. Roy, An inventory model for single-period products with reordering opportunities under fuzzy demand, Computers & Mathematics with Applications, 53 (2007), 1502-1517.doi: 10.1016/j.camwa.2006.04.029.
[13]	H. Emmons and S. M. Gilbert, Note: The role of returns policies in pricing and inventory decisions for catalogue goods, Management Science, 44 (1998), 276-283.doi: 10.1287/mnsc.44.2.276.
[14]	M. L. Fisher, J. H. Hammond, W. R. Obermeyer and A. Raman, Making supply meet demand in an uncertain world, Harvard Business Review, 5-6 (1994), 83-93.
[15]	X. Gan, S. Sethi and H. Yan, Channel coordination with a risk neutral supplier and a downside risk-averse retailer, Production and Operations Management, 14 (2005), 80-89.doi: 10.1111/j.1937-5956.2005.tb00011.x.
[16]	G. Hadley and T. M. Whitin, "Analysis of Inventory Systems," Prentice-Hall, Englewood Cliffs, NJ, 1963.
[17]	M. Hervé., "Axioms of Cooperative Decision Making," Econometric Society Monographs, 15, Cambridge University Press, Cambridge, 1988.
[18]	Z. S. Hua and S. J. Li, Impacts of demand uncertainty on retailer's dominance and manufacturer -retailer supply chain cooperation, Omeg, 36 (2008), 697-714.doi: 10.1016/j.omega.2006.02.005.
[19]	R. Jarrow and F. Zhao, Downside loss aversion and portfolio management, Management Science, 52 (2006), 558-566.
[20]	H. S. Lau and A. H. L. Lau, Reordering strategies for a newsboy-type product, European Journal of Operational Research, 103 (1997), 557-572.doi: 10.1016/S0377-2217(96)00304-9.
[21]	H. Lee and S. Whang, Decentralized multi-echelon supply chains: Incentives and information, Management Science, 45 (1999), 633-642.doi: 10.1287/mnsc.45.5.633.
[22]	J. Y. Lee and L. B. Schwarz, Lead time reduction in a (Q, r) inventory system: An agency perspective, International Journal of Production Economics, 105 (2007), 204-212.
[23]	L. Q. Liu, A. J. Rettenmaier and T. R. Saving, How much and how often: A model of repeated consumption with endogenous consumption frequency, Economics Letters, 110 (2011), 186-188.doi: 10.1016/j.econlet.2010.11.032.
[24]	J. Mazzola and R. Schantz, Single-facility resourse allocation under capacity-based economies and diseconomies of scope, Management Science, 41 (1995), 669-689.doi: 10.1287/mnsc.41.4.669.
[25]	M. $\ddotO$nal and H. E. Romeijn, Two-echelon requirements planning with pricing decisions, Journal of Industrial and Management Optimization, 5 (2009), 767-781.doi: 10.3934/jimo.2009.5.767.
[26]	V. Padmanabhan and I. P. L. Png, Returns policies: Make money by making good, Sloan Management Review, 37 (1995), 65-72.
[27]	A. Pan, S. Y. S. Leung, K. L. Moon and K. W. Yeung, Optimal reorder decision-making in the agent -based apparel supply chain, Expert Systems with Applications, 36 (2009), 8571-8581.doi: 10.1016/j.eswa.2008.10.081.
[28]	M. Parlar and Z. K. Weng, Designing a firm's coordinated manufacturing and supply decisions with short product life cycles, Management Science, 43 (1997), 1329-1344.doi: 10.1287/mnsc.43.10.1329.
[29]	M. E. Schweitzer and G. P. Cachon, Decision bias in the newsvendor problem with a known demand distribution: Experimental evidence, Management Science, 46 (2000), 404-420.doi: 10.1287/mnsc.46.3.404.12070.
[30]	K. Shi and T. J. Xiao, Coordination of a supply chain with a loss-averse retailer under two types of contracts, International Journal of Information and Decision Sciences, 1 (2008), 5-25.doi: 10.1504/IJIDS.2008.020033.
[31]	D. Sophia, Design of supply chains for quick response: the case of apparel industry, 2001. Available from: http://www.icsd.aegean.gr/aic2001/papers/Daskalaki.ps.
[32]	T. A. Taylor, Supply chain coordination under channel rebates with sales effort effects, Management Science, 48 (2002), 992-1007.doi: 10.1287/mnsc.48.8.992.168.
[33]	A. Tsay and N. Agrawal, Channel dynamics under price and service competition, Manufacturing & Service Operations Management, 2 (2000), 372-391.doi: 10.1287/msom.2.4.372.12342.
[34]	B. Tomlin and Y. Wang, On the value of mix flexibility and dual sourcing in unreliable newsvendor networks, Manufacturing & Service Operations Management, 7 (2005), 37-57.doi: 10.1287/msom.1040.0063.
[35]	C. X. Wang and S. Webster, Channel coordination for a supply chain with a risk-neutral manufacturer and a loss-averse retailer, Decision Sciences, 38 (2007), 361-389.doi: 10.1111/j.1540-5915.2007.00163.x.
[36]	Z. K. Weng, Coordinating order quantities between the manufacturer and the buyer: A generalized newsvendor model, European Journal of Operational Research, 156 (2004), 148-161.doi: 10.1016/S0377-2217(03)00003-1.
[37]	J. Wu, J. Li, S. Y. Wang and T. C. E Cheng, Mean-variance analysis of the newsvendor model with stockout cost, Omega, 37 (2009), 724-730.doi: 10.1016/j.omega.2008.02.005.
[38]	T. J. Xiao and D. Q. Yang, Price and service competition of supply chains with risk-averse retailers under demand uncertainty, International Journal of Production Economics, 114 (2008), 187-200.doi: 10.1016/j.ijpe.2008.01.006.
[39]	T. J. Xiao, K. Shi and D. Q. Yang, Coordination of a supply chain with consumer return under demand uncertainty, International Journal of Production Economics, 124 (2010), 171-180.doi: 10.1016/j.ijpe.2009.10.021.
[40]	H. Xiong, B. T. Chen and J. Xie, A composite contract based on buy back and quantity flexibility contracts, European Journal of Operational Research, 210 (2011), 559-567.doi: 10.1016/j.ejor.2010.10.010.
[41]	X. L. Xu and X. Q. Cai, Price and delivery-time competition of perishable products, Journal of Industrial and Management Optimization, 4 (2008), 843-859.doi: 10.3934/jimo.2008.4.843.
[42]	Q. Y. Yan, J. B. Li and J. L. Zhang, Licensing schemes in Stackelberg model under asymmetric information of product costs, Journal of Industrial and Management Optimization, 3 (2007), 763-774.doi: 10.3934/jimo.2007.3.763.
[43]	C. T. Yang, L. Y. Ouyang, H. F. Yen and K. L. Lee, Joint pricing and ordering policies for deteriorating item with retail price-dependent demand in response to announced supply price increase, Journal of Industrial and Management Optimization, 9 (2013), 437-454.doi: 10.3934/jimo.2013.9.437.
[44]	J. Zhang and G. V. Frazier, Strategic alliance via co-opetition: Supply chain partnership with a competitor, Decision Support Systems, 51 (2011), 853-863.
[45]	J. Zhang and J. Chen, Externality of contracts on supply chains with two suppliers and a common retailer, Journal of Industrial and Management Optimization, 6 (2010), 795-810.doi: 10.3934/jimo.2010.6.795.
[46]	Y. W. Zhou and S. D. Wang, Manufacturer-buyer coordination for newsvendor-type- products with two ordering opportunities and partial backorders, European Journal of Operational Research, 198 (2009), 958-974.doi: 10.1016/j.ejor.2008.10.026.
[47]	Y. Zhou and D. H. Li, Coordinating order quantity decisions in the supply chain contract under random demand, Applied Mathematical Modeling, 31 (2007), 1029-1038.doi: 10.1016/j.apm.2006.02.011.