Risk intermediation in supply chains

Vipul Agrawal, Sridhar Seshadri

Research output: Contribution to journalArticlepeer-review

Abstract

This paper demonstrates that an important role of intermediaries in supply chains is to reduce the financial risk faced by retailers. It is well known that risk averse retailers when faced by the classical single-period inventory (newsvendor) problem will order less than the expected value maximizing (newsboy) quantity. We show that in such situations a risk neutral distributor can offer a menu of mutually beneficial contracts to the retailers. We show that a menu can be designed to simultaneously: (i) induce every risk averse retailer to select a unique contract from it; (ii) maximize the distributor's expected profit; and (iii) raise the order quantity of the retailers to the expected value maximizing quantity. Thus inefficiency created due to risk aversion on part of the retailers can be avoided. We also investigate the influence of product/market characteristics on the offered menu of contracts.

Original languageEnglish (US)
Pages (from-to)819-831
Number of pages13
JournalIIE Transactions (Institute of Industrial Engineers)
Volume32
Issue number9
DOIs
StatePublished - Sep 2000
Externally publishedYes

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering

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