Journal of the Korean Operations Research and Management Science Society (한국경영과학회지)

The Korean Operations Research and Management Science Society (한국경영과학회)
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Designing Revenue Sharing Contract for Irrational Newsvendors

소매상의 비합리성을 고려한 공급사슬의 수익 공유 계약 설계에 대한 연구

  • Received : 2016.03.24
  • Accepted : 2016.05.10
  • Published : 2016.05.31
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Abstract

Irrational ordering decisions of supply chain members have been gaining growing importance in the area of supply chain management. Irrational ordering behaviors that deviate from the profit maximizing decisions in the newsvendor settings have observed with human experiments in recent research. These behaviors can be modeled with several typical decision bias elements. This bias in ordering decisions affects the performance of supply chain contracts designed based on the assumption that the supply chain members make optimal decisions, making it necessary to design supply chain contracts by considering the irrationality. The purpose of this research is to derive a method to design the revenue sharing contract that considers human irrationality in ordering decisions. This research considers a simple two-echelon supply chain consisting of one supplier and one retailer, where the supplier is assumed to be perfectly rational while the retailer making newsvendor type ordering decisions displays irrational ordering behaviors. Under this environment, this research analytically models the revenue sharing contract to maximize the total supply chain profit or the supplier's own profits while considering the three decision bias patterns of the retailer, which include the pull-to-center effect, the prospect theory, and the increased subjective sensitivity to the revenue sharing ratio. Irrationality parameters are measured through human experiments based on which and through numerical simulations, we showed that significant improvements in the supply chain performance can be achieved.

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References

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