Transfer of Risk in Supply Chain Management with Joint Pricing and Inventory Decision Considering Shortages

Abstract

This study is the first to consider a distribution-free approach in a newsvendor model with a transfer of risk and back-ordering. Previously, in many articles, discrete demand is considered. In this model, we consider a newsvendor selling a single seasonal item with price-dependent stochastic demand. Competition in markets has forced the retailer and manufacturer to coordinate in decentralized supply chain management. A coordination contract is made between a retailer and manufacturer to overcome the randomness of demand for a short-life-cycle product. The retailer pays an additional amount per product to transfer the risk of unsold items. The manufacturer bears the cost of unsold products from the retailer. Shortages are allowed with back-ordering costs during the season. The distribution-free model is developed and solved with only available demand data of mean and standard deviation. Stackelberg’s game approach is used to calculate the optimal ordering quality and price. This model aims to maximize expected profit by optimizing unit selling price and ordered quantity through coordination. To illustrate that the model is robust, numerical experiment and sensitivity analyses are conducted for both decentralized and centralized supply chain management. For applicability of the model in the real-world business scenario, managerial insights are provided with sensitivity analysis.