Quality competition and risk aversion have become more and more common in today's many industries, making it a challenge to supply chain management and coordination. This paper considers a vendor-managed inventory (VMI) supply chain comprising two risk-averse manufacturers who sell their competing products through a common retailer. Market demand shared by each manufacturer is dependent on the quality level of its own product as well as on the competitor's product quality. The Conditional Value-at-Risk (CVaR) criterion is employed to formulate the risk aversion of manufacturers. This study first develops basic models without coordination mechanism and analyzes the effect of the quality sensitivity, competition intensity, risk aversion degree and cost coefficient of quality improvement on equilibrium decisions and supply chain efficiency. Further, a combined contract composed of option and cost-sharing is proposed to investigate the supply chain coordination issue. The results reveal that the combined contract can coordinate the supply chain and achieve a win-win outcome only when the manufacturers are low in risk aversion, and the system-wide profit of the supply chain can be allocated arbitrarily only by the option price. Also, this research examines the effect of the quality sensitivity, competition intensity, risk aversion degree and cost coefficient of quality improvement on the feasible region of option price.
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Table 1. Differences between this paper and other relevant papers
Table 2. Notations
Symbol | Definition |
$ i $ | Index for product, $ i = 1, 2 $ |
$ {d_i} $ | Quality dependent deterministic demand for the $ i $th product |
$ {D_i} $ | Demand faced by the retailer for the $ i $th product |
$ {c_i} $ | Production cost per unit of the $ i $th product |
$ {w_i} $ | Wholesale price per unit of the $ i $th product |
$ {p_i} $ | Retail price per unit of the $ i $th product |
$ {\upsilon _i} $ | Salvage value per unit of the $ i $th product |
$ {x_i} $ | Random demand faced by the retailer for the $ i $th product |
$ {L_i}, {U_i} $ | Lower bound and upper bound on $ {x_i} $ |
$ {f_i}({x_i}) $ | Probability density function of the random variable $ {x_i} $ |
$ {F_i}({x_i}) $ | Cumulative distribution function of the random variable $ {x_i} $ |
$ {a_i} $ | Initial market size of the $ i $th product |
$ \alpha $ | Demand sensitivity of product $ i $'s own quality improvement level |
$ \beta $ | Competition intensity |
$ {s_i} $ | Quality improvement level of the $ i $th product |
$ {Q_i} $ | Production quantity for the $ i $th product |
$ {\eta _i} $ | Risk aversion coefficient of the $ i $th manufacturer |
$ {k_i} $ | Cost coefficient of investment in quality improvement of product $ i $ |
Table 3. Effect of the quality sensitivity on the expected profits and supply chain efficiency
$ \alpha $ | $ E\pi _r^{wp*} $ | $ E\pi _m^{wp*} $ | $ E\pi _{sc}^{wp*} $ | $ E\pi _{sc}^{I*} $ | $ {E_f} $ |
1 | 24133 | 7722 | 39577 | 46960 | 84.28% |
2 | 26053 | 7962 | 41977 | 49960 | 84.02% |
3 | 28933 | 8362 | 45657 | 54960 | 83.07% |
4 | 32773 | 8922 | 51576 | 61960 | 81.69% |
5 | 37573 | 9642 | 56857 | 70960 | 80.13% |
Table 4. Effect of the competition intensity on the expected profits and supply chain efficiency
$ \beta $ | $ E\pi _r^{wp*} $ | $ E\pi _m^{wp*} $ | $ E\pi _{sc}^{wp*} $ | $ {E_f} $ |
1 | 37573 | 9642 | 56857 | 80.13% |
2 | 39973 | 9402 | 58777 | 82.83% |
3 | 42373 | 9002 | 60377 | 85.09% |
4 | 44773 | 8442 | 61657 | 86.89% |
5 | 47173 | 7722 | 62617 | 88.24% |
6 | 49573 | 6842 | 63257 | 89.14% |
7 | 51973 | 5802 | 63577 | 89.60% |
8 | 54373 | 4602 | 63577 | 89.60% |
9 | 56773 | 3242 | 63257 | 89.14% |
10 | 59173 | 1722 | 62617 | 88.24% |
Table 5. Effect of the risk aversion degree on the expected profits and supply chain efficiency
$ \eta $ | $ E\pi _r^{wp*} $ | $ E\pi _m^{wp*} $ | $ E\pi _{sc}^{wp*} $ | $ {E_f} $ |
1 | 38148 | 9833 | 57814 | 81.47% |
0.95 | 37861 | 9738 | 57337 | 80.80% |
0.9 | 37573 | 9642 | 56857 | 80.13% |
0.85 | 37286 | 9546 | 56378 | 79.45% |
0.8 | 36998 | 9451 | 55900 | 78.78% |
Table 6. Effect of the cost coefficient of quality improvement on the expected profits and supply chain efficiency
$ k $ | $ E\pi _r^{wp*} $ | $ E\pi _m^{wp*} $ | $ E\pi _{sc}^{wp*} $ | $ E\pi _{sc}^{I*} $ | $ {E_f} $ |
0.1 | 51973 | 11562 | 75097 | 95960 | 78.23% |
0.2 | 37573 | 9642 | 56857 | 70960 | 80.13% |
0.3 | 32773 | 9002 | 50777 | 62627 | 81.08% |
0.4 | 30373 | 8682 | 47737 | 58460 | 81.66% |
0.5 | 28933 | 8490 | 45913 | 55960 | 82.05% |
Table 7. Effect of the quality sensitivity on the feasible region of option price
$ \alpha $ | 1 | 2 | 3 | 4 | 5 |
feasible region of $ o $ | $ [3.76, 4.16] $ | [3.75, 4.17] | [3.75, 4.20] | [3.74, 4.23] | [3.73, 4.27] |
Table 8. Effect of the competition intensity on the feasible region of option price
$ \beta $ | 1 | 2 | 3 | 4 | 5 |
feasible region of $ o $ | [3.73, 4.27] | [3.73, 4.23] | [3.72, 4.20] | [3.72, 4.17] | [3.71, 4.16] |
$ \beta $ | 6 | 7 | 8 | 9 | 10 |
feasible region of $ o $ | [3.69, 4.16] | [3.68, 4.19] | [3.66, 4.26] | [3.63, 4.38] | [3.59, 4.59] |
Table 9. Effect of the risk aversion degree on the feasible region of option price
$ \eta $ | 0.94 | 0.92 | 0.90 | 0.88 | 0.86 |
feasible region of $ o $ | [3.24, 3.97] | [3.49, 4.12] | [3.73, 4.27] | [3.98, 4.42] | [4.24, 4.57] |
Table 10. Effect of the cost coefficient of quality improvement on the feasible region of option price
$ k $ | 0.1 | 0.2 | 0.3 | 0.4 | 0.5 |
feasible region of $ o $ | [3.72, 4.33] | [3.73, 4.27] | [3.74, 4.24] | [3.75, 4.22] | [3.75, 4.21] |
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Structure of the supply chain
Effect of the option price on profit allocation under channel coordination