Risk Averse Members Coordination with Extended Buy-Back Contract

Zheng Qin, Xiaofeng Xue

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DOI: 10.4236/jssm.2010.31003                

Abstract

This paper considers how to coordinate a supply chain (SC) consisted of one supplier and one retailer who possess different risk aversion preference with a contract. Based on the classical buy-back contract, this paper presents an extended buy-back contract. In addition to the member’s objective of maximizing his expected profit, downside risk constraint is used to represent the SC member’s risk aversion preference. Under different risk aversion preference combination, the SC perfect solution existence conditions are identified and the specific contract is provided accordingly. This research finds out that, with a low risk aversion supplier and a high risk aversion retailer, the supplier as the SC coordinator can give the retailer incentive to increase the order quantity so as to reach SC perfect coordination. Finally a numerical analysis verifies the effectiveness of the extended buy-back contract.

Keywords

Downside Risk, Buy-Back Contract, Supply Chain Coordination, Risk Aversion Preference

Conflicts of Interest

The authors declare no conflicts of interest.

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