Coordination of Supply Chains with Risk-Averse Agents

Production & Operations Management, Vol. 13, No. 2, pp. 135-149, 2004

15 Pages Posted: 11 Feb 2008 Last revised: 31 Mar 2008

See all articles by Xianghua Gan

Xianghua Gan

Southwestern University of Finance and Economics (SWUFE) - School of Business Administration

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management

Abstract

The extant supply chain management literature has not addressed the issue of coordination in supply chains involving risk-averse agents. We take up this issue and begin with defining a coordinating contract as one that results in a Pareto-optimal solution acceptable to each agent. Our definition generalizes the standard one in the risk-neutral case. We then develop coordinating contracts in three specific cases: (i) the supplier is risk neutral and the retailer maximizes his expected profit subject to a downside risk constraint; (ii) the supplier and the retailer each maximizes his own mean-variance trade-off; and (iii) the supplier and the retailer each maximizes his own expected utility. Moreover, in case (iii), we show that our contract yields the Nash Bargaining solution. In each case, we show how we can find the set of Pareto-optimal solutions, and then design a contract to achieve the solutions. We also exhibit a case in which we obtain Pareto-optimal sharing rules explicitly, and outline a procedure to obtain Pareto-optimal solutions.

Keywords: supply chain management, Pareto-optimality, coordination, risk aversion, Nash Bargaining solution, operations management

JEL Classification: C61, M11, C71, C72, D81

Suggested Citation

Gan, Xianghua and Sethi, Suresh and Yan, Houmin, Coordination of Supply Chains with Risk-Averse Agents. Production & Operations Management, Vol. 13, No. 2, pp. 135-149, 2004 . Available at SSRN: https://ssrn.com/abstract=1090711

Xianghua Gan

Southwestern University of Finance and Economics (SWUFE) - School of Business Administration ( email )

No.55 Guanghuacun Street
Chengdu, 610074
China

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management ( email )

Shatin, New Territories
Hong Kong

Register to save articles to
your library

Register

Paper statistics

Downloads
254
Abstract Views
1,311
rank
120,206
PlumX Metrics