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Retailers procurement risk decision

Author: WangZuoZuo
Tutor: ChenXiangFeng
School: Fudan University
Course: Management Science and Engineering
Keywords: option internal risk financial risk trust crisis risk decision
CLC: F274;F224
Type: Master's thesis
Year: 2011
Downloads: 195
Quote: 0
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Abstract

Demand uncertainty is a common external risk in supply chain operation. Retailers, which are referred as the terminal points of supply chain, approach the consumption market within the nearest distance, confronting the external risk directly. Therefore, during the process of retailers’ purchasing activities, there is a corresponding need to search effective methods to carry out the purchasing risk management. The original design intention of option and other derivatives is to hedge the risk. With the successful application of option in financial risk management, managers start to consider combining the option contract with retailers’ purchasing activities to search new risk management tools. Given the demand uncertainty confronted during the process of retailers’ purchasing activities, it has been proven that manufacturers can provide call option and put option to increase the flexibility of retailers’ production decision-making with a significant result in risk control. Many scholars had analyzed the retailers’optimal production decision-making model under option contract in previous research. In addition, scholars had work out how to adjust the combination of option price parameters to achieve the supply chain coordination in a manufacturer dominant supply chain.Supply chain coordination can not only enjoy the maximum profit, but also eliminate the double marginalization effect which can not be resolved in traditional retailers’purchasing pattern. From the view of the scope and type of retailers’risk management, purchasing pattern with option contract can lower retailers’external risk. From the view of venture investment, diversify option portfolio can reduce the retailers’ external risk to a minimum level. Nevertheless, the optimal purchasing plan may be held up or even adjusted when there is financial crisis, capital restriction coming from the inner part of the corporation. Meanwhile, in a majority of manufacturer dominant supply chain, the retailers’weak negotiation capability determines their entirely receiving manufacturer’s option quotation. Not only should the retailers hedge their external risk with option contract, but also be concern with their expectation profit variance. Based on the purchasing pattern with option contract, this article prove that when manufacturer achieve the supply chain coordination by adjusting the combination of option price parameters, it can also dominate the retailers’allocation of entire supply chain profit. Therefore, there exists trust crisis and moral risk between the manufacturer and retailers. Given the problems which may be confronted with option contract, this paper summarizes them as the internal risk during the process of retailers’purchasing activities and aims to research how to make optimal decision by retailers under internal risk environment.

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