On supply chain contracts as risk sharing mechanisms

Abstract

In this paper, we consider risk and return in the buyback contract and the revenue sharing contract. Risk is measured by the variability in profits and return by average profits. We analyse the two firms in the supply chain using the Newsboy inventory model and standard results related to modelling of buyback contracts and revenue sharing contracts. We also use simulation. We show that the two contracts represent an opportunity for the manufacturer to increase return at the expense of taking a moderate risk. For the retailer, it is possible to benefit both ways in the two contracts. We show numerically that he can simultaneously get a higher return and a lower risk by entering into the two contracts. The manufacturer's risk always gets increased with the two contracts. The retailer's risk can get increased or lowered with the contracts. If the contract parameters are chosen such that the retailer's risk gets lowered, then the contracts act as risk sharing mechanisms. They lower the higher risk of the retailer and transfer some of it to the manufacturer.