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... Therefore, such materials and equipment should be stored in advance. When storing emergency materials, the capacity of each level of material base and the number of professional personnel may also vary [40]. A suitable storage environment is necessary for materials and equipment. ...
... Set the rescue distances ( initial R ) of county-level material bases to 35,40,45,50,55,60,65,70,75,80,85, and 90 km, respectively. Keep the other parameters of the model unchanged and obtain the relationship between rescue distance and the costs of county-level material bases. ...
As one of the important energy industries, the safe production of coal mines not only concerns the safety of employees, but also affects the sustainable development of society. Recent rescue cases have shown that the layout of material bases and the allocation of emergency materials need to be further optimized. For this problem, this paper adopts the material hierarchical reserve mode for the first time, combining the material hierarchical reserve mode, multi-level material base selection model, and fuzzy analytic hierarchy process (FAHP) method to determine the optimal location of the coal mine material base in Liaoning Province. Determine the reserve level of emergency materials through evaluation and clustering analysis of various emergency materials. Improve the traditional gravity model and construct a multi-objective planning model for multi-level material base site selection. Apply the reserve level of emergency materials and real regional data to the site selection model, and use genetic algorithm (GA) to solve the model. Then, the optimal site selection scheme was selected using FAHP, and sensitivity analysis was conducted. The research results indicate that: (1) 9 county-level, 6 city-level and 2 provincial-level material bases will be constructed. (2) The location selection of material bases is not only affected by costs, but also by the density of road networks. (3) The use of hierarchical material reserve mode can significantly reduce the construction cost of material bases. Compared to the traditional material reserve mode, it can reduce costs by 86.6%. Compared to a single-level material bases, it can still reduce costs by 74.7%. The research results of this paper can be used for the selection of emergency material bases and the allocation of emergency material reserves, which can reduce costs and promote the improvement of regional emergency rescue capabilities.
... Jammerneg et al. [12] compared the supply chain profits and the optimal order quantities when suppliers had different risk preferences in the newsvendor problem while considering the role of wholesale price contracts. Liu et al. [13] analyzed the impact of the option contract on optimal decision making in a humanitarian supply chain (HSC) consisting of a humanitarian agency and a loss-averse supplier. Yi et al. [14] constructed a maritime supply chain with one port and two carriers under a wholesale price contact and two-tariff contract, and analyzed how risk-averse behavior and contract unobservability impact the pricing and contract preference. ...
As economic fluctuations and market uncertainty intensify, supply chain members face enormous challenges. To explore the role of revenue-sharing contracts in supply chain members with different risk preferences, we study the risk-averse two-stage supply chain coordination in a revenue-sharing contract under three different scenarios: the supplier is risk-averse and the retailer is risk-neutral, or the retailer is risk-averse and the supplier is risk-neutral, or both are risk-averse. We find that the revenue-sharing contract mechanism allows the supplier to offer a lower wholesale price, effectively bearing part of the retailer’s cost risk. In return, the retailer compensates the supplier with a larger portion of their revenue, and the lower wholesale price also stimulates the retailer’s desire to order more products. In addition, risk aversion always reduces the optimal order quantity in the supply chain. Interestingly, when the retailer’s risk aversion level is low, the supplier charges a higher wholesale price under the risk-averse supply chain than that under the risk-neutral supply chain. However, if the retailer’s risk aversion level is high enough, the supplier should charge a lower price to stimulate the retailer under the risk-averse supply chain to retain the order size to maintain the channel profit.
It is vital to pre-position a certain amount of relief supplies at pre-disaster. But governments are often confronted with a dilemma of coordinating inventory cost and stock-out cost in pre-positioning relief supplies. Pre-positioning strategies for relief supplies depend on the natural characteristic of relief supplies and the most urgent needs at post-disaster. Therefore, we classify relief supplies by their natural characteristic and priority, and introduce an option contract into relief supplies pre-positioning system which consists of a single government and an agreement enterprise. Specially, a consumable and relatively urgent relief supplies pre-positioning (C-RUP) model and a non-consumable and urgent relief supplies pre-positioning (NC-UP) model are established. The optimal decisions of the government and the enterprise are derived, respectively. The relief supply chain coordination is achieved with the option contract. Under channel coordination, the two models can not only improve the government’s emergency ability and support capacity, but also reduce the government’s inventory risk when compared to the government single pre-positioning model. Moreover, we give out the conditions that the two sides can reach a win-win situation. Lastly, we propose important managerial insights for pre-positioning strategies related to different types of relief supplies.
Procurement of aid material such as vaccines by a humanitarian agency (HA) is often fraught with uncertainties. For example, an epidemic outbreak can increase the demand for materials (such as vaccines) in a very short period. Most of the HAs depend on external donations (funding) to procure necessary vaccines to meet this demand. Hence, it is financially infeasible and operationally inefficient for the HA to procure large quantities of aid material in anticipation of a demand spike during an epidemic outbreak. Thus, the procurement processes for aid materials such as vaccines need to be flexible enough to meet these demand fluctuations. HAs can achieve this flexibility by employing a procurement mechanism portfolio that includes upfront buying, capacity reservation, spot market purchase, etc. However, the challenge lies in identifying the optimal combination of multiple procurement mechanisms and how they can be utilized to coordinate the humanitarian supply chain. In this study, we explore the feasibility of quantity flexibility contracts along with discount incentives combined with spot market procurement in humanitarian supply chains for aid material procurement. We also derive the conditions under which the contract can achieve systemic coordination between the supplier and HA. Furthermore, we also illustrate that under optimal conditions, the procurement of aid material using multiple procurement mechanisms by HA can also reduce the humanitarian supply chain’s total cost.
Experimental results support that overconfident newsvendors deviate from the optimal inventory levels to place orders closer to the mean of demand distributions, thereby lowering profits. To improve performance, we investigate whether nonstandard preferences based on prospect theory can manage overconfident newsvendors. We develop a framework where a manager determines a profit‐based target, which serves as a reference point in the newsvendor's utility function. We show that target‐setting can induce optimal orders for low‐margin products. We extend our model to a duopoly and show that the type of competition determines whether target‐setting improves performance beyond the monopolist setting. Decentralized competition, where competing newsvendors have differet managers, reduces the effectiveness of target‐setting. However, centralized competition, where competing newsvendors share the same manager, increases the range of profit margins within which target‐setting can achieve the system‐optimal order quantities. We compare profit‐margin targets with gross‐profit targets throughout our analysis. Although the targets offer similar performance, we find that profit‐margin [gross‐profit] targets dominate for extremely [moderately] low‐margin products when the manager is uncertain about the newsvendor's overconfidence level. However, when managing a newsvendor with an uncertain degree of loss aversion, we find that profit‐margin targets offer greater benefits regardless of the product's profitability.
The uncertainty associated with the location, severity and timing of disaster makes it difficult for the humanitarian organization (HO) to predict demand for the aid material and thereby making the relief material procurement even more challenging. This research explores whether options contract can be used as a mechanism to aid the HO in making procurement of relief material less challenging by addressing two main issues: inventory risk for buyers and over-production risk for suppliers. Furthermore, a contracting mechanism is designed to achieve coordination between the HO and aid material suppliers in the humanitarian supply chain through optimal pricing. The options contract is modelled as a stylized version of the newsvendor problem that allows the HO to adjust their order quantity after placing the initial order at the beginning of the planning horizon. This flexibility helps to mitigate the risk of both overstocking and understocking for the HO as well as the risk of overproduction for the supplier. Our results indicate that the optimal values for decision parameters are not “point estimates” but a range of prices, which can facilitate negotiation between the two parties for appropriate selection of contract parameters under an options contract. The results imply that options contract can aid in the decentralized approach of fixing the prices between the HO and the supplier, which in turn would help in achieving systemic coordination.
Loss-averse behavior makes the newsvendors avoid the losses more than seeking the probable gains as the losses have more psychological impact on the newsvendor than the gains. In economics and decision theory, the classical newsvendor models treat losses and gains equally likely, by disregarding the expected utility when the newsvendor is loss-averse. Moreover, the use of unbounded utility to model risk attitudes fails to explain some decision-making paradoxes. In contrast, this paper deals with the utility maximization of the newsvendor using a class of bounded utility functions to study the effect of loss aversion on the newsvendor certainty equivalents and risk premiums. New formulas are introduced to find the utility-optimal order quantity of the normal distribution. The results show that when an exponential loss aversion exists, the classical newsvendor optimal quantity serves as a lower bound when the overage costs are high and as an upper bound when the underage costs are high. In addition, we show that high loss aversion entails higher risk premiums. Similar conclusion holds when the overage/underage costs increase. Higher standard deviations, on the other hand, mean lower utility-optimal quantities and higher risk premiums. The presented formulas are advantageous in finding the optimal order quantities and risk premiums of a stochastic short-shelf life inventory when the loss is a key factor in the decision-making process.
Pre-positioning of relief supplies is one important preparedness action for natural disasters. This paper proposes the importance of supplier selection in humanitarian relief, and integrates it into the pre-positioning strategy. These suppliers have own physical inventories for regular business, and relief agencies are assumed to be able to use such inventories for disaster response by providing compensation. The supplier selection criteria include price discounts offered by suppliers based on order quantity and required lead time as well as physical inventory. By considering disruption risks, this paper presents a two-stage stochastic programming model to produce plans including facility location and inventory, supplier selection, and distribution of relief supplies. A case study focused on hurricane threats in the Gulf Coast area of the US illustrates the application of the proposed model. Sensitivity analysis of comparison experiments offers managerial insights for relief agencies.
Pre-positioning of relief supplies is one important preparedness action for natural disasters. This paper proposes the importance of supplier selection in humanitarian relief, and integrates it into the pre-positioning strategy. These suppliers have own physical inventories for regular business, and relief agencies are assumed to be able to use such inventories for disaster response by providing compensation. The supplier selection criteria include price discounts offered by suppliers based on order quantity and required lead time as well as physical inventory. By considering disruption risks, this paper presents a two-stage stochastic programming model to produce plans including facility location and inventory, supplier selection, and distribution of relief supplies. A case study focused on hurricane threats in the Gulf Coast area of the US illustrates the application of the proposed model. Sensitivity analysis of comparison experiments offers managerial insights for relief agencies.
Some analysts claim that Bernoulli's utility function is "reference-independent", so it is not able to generate a loss aversion index, and that the theoretical framework of Prospect Theory (PT) is required to achieve those results. This paper examines that claim and finds that the geometry of Bernoulli's original utility function specification either explains or implies key elements of PT: reference dependence and a loss aversion index. Theory and evidence show that the loss aversion index constructed from reference wealth in Bernoulli's utility specification is in the domain of attraction of a stable law. That is, its distribution is a slow varying function with a fat tail that decays like a power law. Additionally, the index can be tested with a modified Fisher z-transform test. Bernoulli's utility function also sheds light on why loss aversion may be overestimated under PT. In a nutshell, Bernoulli's utility function is alive and well.
In humanitarian operations management, a supply and purchasing issue has long plagued practitioners and scholars. A strategy that involves the purchase of relief supplies immediately after a disaster (instant purchasing) can reduce operational cost. However, purchasing price and possible supply scarcity are high because of the time urgency. Alternatively, pre-purchasing relief supplies is a strategy that is characterized by a low purchase price. However, this approach entails a loss associated with the uncertainty of demand and an increase in inventory cost. To resolve this problem, we introduce a supply chain methodology into humanitarian operations management by considering the system as a relief supply chain. We determine that pre-purchasing relief supplies from a supplier with an option contract is superior to both pre-purchasing with a buyback contract and instant-purchasing with a return policy. An option contract enables the coordination of a relief supply chain and the achievement of Pareto improvement. Additionally, with consideration of the risk level and preference, profit distribution with an option contract becomes acceptable for both the supplier and the purchaser.
Current understanding in operations management is that prospect theory, as a theory of decision making under uncertainty, cannot systematically explain the ordering behavior observed in experiments on the newsvendor problem. We suggest this is because the newsvendor’s reference point is assumed to be the status quo, i.e., zero payoff. We propose an alternative based on newsvendor’s salient payoffs and show that prospect theory can, in fact, account for experimental results.
This paper was accepted by Serguei Netessine, operations management.
In the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand. If too much is ordered, stock is left over at the end of the period, whereas if too little is ordered, sales are lost. The expected profit-maximizing order quantity is well known, but little is known about how managers actually make these decisions. We describe two experiments that investigate newsvendor decisions across different profit conditions. Results from these studies demonstrate that choices systematically deviate from those that maximize expected profit. Subjects order too few of high-profit products and too many of low-profit products. These results are not consistent with risk-aversion, risk-seeking preferences, Prospect Theory preferences, waste aversion, stockout aversion, or the consequences of underestimating opportunity costs. Two explanations are consistent with the data. One, subjects behave as if their utility function incorporates a preference to reduce ex-post inventory error, the absolute difference between the chosen quantity and realized demand. Two, subjects suffer from the anchoring and insufficient adjustment bias. Feedback and training did not mitigate inventory order errors. We suggest techniques to improve decision making.
Purpose : This paper aims to develop and verify a framework of logistics aspects for flood emergency planning. Design/methodology/approach : Provides a topical review of academic literature, illustrative case study and structured interviews in practice. Findings : Creates and details a framework for logistics flood emergency planning on four aspects: demand management, supply management, inventory management and resource management. Research limitations/implications : The paper is empirical in nature and based on an investigation within one country (the Netherlands) that is considered an expert in this area; the framework requires international testing. Practical implications : The framework presented provides practitioners with a tool for logistics flood emergency planning and highlights essential elements of these plans. Originality/value :The field of humanitarian logistics so far has received limited attention by logistics academics and there is a strong need for empirical research in this area. This paper provides the results of an empirical investigation into a highly
The occurrence of a disaster and its location, type, intensity, scope and duration are highly uncertain, making it hard to accurately estimate the emergency demand. As the main purchasers and managers of emergency supplies, governments face shortage and surplus risks when pre-purchasing and reserving emergency supplies before disasters occur. To address this dilemma, we design an emergency supplies procurement strategy based on a bidirectional option contract (BOC) by considering the system as a relief supply chain. Expected profit functions of the relief supply chain members include the procurement cost, inventory cost and production cost of emergency supplies, the cost and revenue of option trading, the salvage value and the value of demand satisfaction. We derive the purchaser's optimal procurement portfolio and demonstrate that the BOC enables the coordination of the relief supply chain. We illustrate the superiority of the BOC procurement strategy over the benchmark procurement scenario without the use of the BOC. As an extension, we also compare the BOC with two unilateral option contracts in emergency supplies procurement and summarise the advantage of the BOC. The research extends the application context of the BOC and provides a feasible strategy for governments to procure emergency supplies.
This paper proposes a novel hybrid relief procurement contract in which the specific features of option contract and quantity flexible contract are used to coordinate the supply of a relief item between a supplier and a humanitarian organization. First, a mathematical statistics approach is used to categorize different provinces according to a multi-hazard risk approach. Then, the proposed contract is elaborated. Different managerial insights are derived from conducting several sensitivity analyses in our case study. The results reveal that using the proposed contract can significantly improve the procurement process by reducing the shortage and overstocking risks in humanitarian organizations.
Previous studies assume that the decision makers under supply chain contracting built on the newsvendor problem have by-expectation fairness concerns, that is, an aversion to the inequality of expected profits. However, recent experimental data show that they are actually averse to the inequality of profits at each demand realization, which is referred to as by-state fairness concerns. This paper examines how by-state fairness concerns (only disadvantageous inequality aversion) influence the equilibrium outcomes under a selling-to-the-newsvendor model. Compared with the fairness-neutral case, while the retailer’s concern for by-expectation fairness (only disadvantageous inequality aversion) can improve supply chain performance, his strong concern for by-state fairness can worsen it. In particular, when demand variance is large, the retailer can earn less for by-state fairness concerns. Similar to by-expectation fairness, the supplier’s by-state fairness concerns can hurt both her and the retailer. The supplier’s profit decreases with demand variance, whereas the retailer’s expected profit is nonmonotone with it. When both supply chain agents care about by-state fairness, compared with the fairness-neutral case, the supplier’s profit decreases, whereas the retailer’s expected profit can either increase or decrease. The region where the retailer earns more will shrink in either the supplier’s disadvantageous inequality parameter or demand variance.
The demand for relief supplies after a sudden disaster is uncertain and sometimes grows rapidly. Because of the uncertainty surrounding the demand, organisations dealing in relief management usually preposition relief supplies to reduce the impact of a disaster. However, with prepositioning, organisations face both overstocking and stockout risks. To reduce these risks, we introduce a bidirectional option contract (BOC) into a two-echelon relief supply chain consisting of a supplier and a humanitarian organisation (HO). We analyse the contract from the perspective of the HO and derive closed-form expressions for the prepositioning quantity and options quantity for the HO, considering uniform and exponential demand distributions of relief supplies. The condition for supply chain coordination between the supply chain members is derived. We compare the results of BOC with the benchmark wholesale price contract (WPC) to show the superiority of BOC. Finally, sensitivity analysis is performed to investigate the impact of model parameters and to determine the conditions under which the BOC is beneficial for both the HO and the supplier.
Killing tens of thousand of people and bringing tremendous loss, epidemics have been one of the most huge and urgent threats for all human kind. Given the abruptness of epidemic outbreaks, quick access to sufficient medical supplies is essential. Most existing research focuses on reserving physical stocks only, while some authors also consider reserving production capacity. This study is the first to consider capital reserves besides physical stocks, a practice that is for instance used in China. We characterize in closed form and graphically under what conditions a certain reserve policy (no reserves, safety stock only, capital reserve only, mixed reserves) is optimal. A key insight is that increased demand uncertainty sometimes leads to lower safety stock levels, although the combined reserves do increase. In such situations, to limit the risk of obsolescence, it is optimal to rely less on safety stocks and more on capital reserves.
Humanitarian aid agencies usually resort to inventory prepositioning to mitigate the impact of disasters by sending emergency supplies to the affected area as quickly as possible. However, a lack of replenishment opportunity after a disaster can greatly hamper the effectiveness of the relief operation due to uncertainty in demand. In this paper, a prepositioning problem is formulated as a two-period newsvendor model where the response phase is divided into two periods. The model acknowledges the demand to be uncertain even after the disaster and utilises the Bayesian approach to revise the demand of the second period. Based on the revised demand, an order is placed at the beginning of the second period to be replenished instantaneously. A two-stage solution methodology is proposed to find the prepositioning quantity and post-disaster replenishment quantity, which minimise the total expected costs of relief operations. A numerical example is presented to demonstrate the solution methodology, and sensitivity analysis is performed to examine the effect of model parameters. The results highlight the indifferent characteristics shown by the replenishment quantity with the variation in model parameters.
We conduct a comprehensive review of recent literature on humanitarian logistics and disaster response operations to provide exploratory-descriptive and correlational value to guide experimental and focused developments in humanitarian management. Special emphasis is placed on the underlying socio-technical phenomenon, the development of optimization models, data availability, the dynamic nature of disasters, uncertainty and the multiple objectives of a disaster supply chain, including the psychology of disasters and human behavior, organizational failures and the role of institutions. Theories, relevant research methods, and topics for future research are identified, resulting in a multidimensional framework for optimizing humanitarian logistics decisions.
This paper studies a voluntary overbooking model under rational expectation equilibrium to promote cooperation between customers and airlines, maintain goodwill of customers, and maximize the expected total returns to airlines. A decision tree analysis is constructed for both customers and airlines. Sensitivity analysis is conducted in both realistic and simulated no-show random variables for validation. The findings suggest considerable mutual benefits associated with a ‘voluntary overbooking’ policy that emphasizes mutual cooperation between passengers and commercial airlines. The main underlying assumption of the paper is that customers are willing to provide valuations to airlines seeking volunteers for overbooking. The originality of the proposed model is the incorporation of elements of the Rational expectations hypothesis into classical overbooking models gleaned from the literature.
Carrier selection is a crucial issue in humanitarian relief operations, and the shortage of transportation vehicles can considerably affect relief distribution. In this paper, the significance of commodity and vehicle suppliers and guaranteeing prevention of shortage via on-time supplying of each relief commodity by the suppliers is emphasized by suggesting the integration of carrier selection and supplier selection for developing contractual agreements in humanitarian logistics. For this close relationship to be described, a scenario-based two-stage stochastic programming model for the establishment of joint decision-making in preparedness and response phases is developed so that a contract can be created on the quantity of reservation of both commodities and vehicles by the suppliers, as well as the transmission of the reserved commodities in the form of commodity purchase and vehicle rent in the response phase. An efficient two-step solution technique is suggested as a solution method for real scale problems, the effectiveness of which can be seen through the results. To illustrate the applicability of the model, a case study is suggested. The application of the model is discussed via numerical studies as well as a sensitivity analysis. The results have provided an appropriate managerial insight for responding to disaster for relief agencies.
Consumers are usually uncertain about the product value in the online channel. They may feel disappointed if the outcome is worse than their prior expectation. This paper explores the effect of consumer disappointment aversion on the online seller’s decisions about pricing, ordering and quick response, where the seller can implement either a partial-coverage strategy or a full-coverage strategy. We identify conditions under which the seller should choose a partial-coverage
strategy to target only “high-value” consumers. Furthermore, we show that disappointment aversion has a significant impact on the employment of quick response. In particular, when the degree of disappointment aversion is sufficiently high, the seller who implements a no-refund policy should not adopt quick response. Finally, we find that the effect of consumers’ disappointment aversion on the seller’s profit depends on the latter’s return policy. If the seller provides no refund to consumers, disappointment aversion is always detrimental to the seller. However, a seller who provides a full refund to consumers may benefit from disappointment aversion. Particularly, it is profitable to adopt a full-refund policy when disappointment aversion and salvage value exceed certain thresholds.
This paper proposes a novel two-period option contract integrated with supplier selection and inventory prepositioning. A two-stage scenario-based mixed possibilistic-stochastic programming model is developed to cope with various uncertainties. The first stage's decisions include supplier selection and capacity reservation level at each supplier/period and the level of inventory prepositioning. Furthermore, decisions regarding the time and exercised amount are made in the second stage. Applicability of the model is validated through a real case study. Finally, several sensitivity analyses are conducted to examine the effect of important parameters on the solutions to gain useful managerial insights.
Option contracts are widely used in practice and can be employed to achieve channel coordination. However, limited research work has been reported on option contracts, which considers the influence of decision-makers’ behavior on their optimal pricing/ordering strategies and the overall supply chain performance. Hence, in the present study, we investigate the fairness concerns of the channel members in a two-echelon supply chain, composed of single supplier and single retailer, wherein the retailer procures products from the supplier using the option contract. A behavioral model of fairness has been developed by using Nash bargaining solution (NBS) as the fairness reference while formulating the utility functions of the channel members. The supplier-led Stackelberg game framework is adopted and the equilibrium values are derived. The results demonstrate that under certain conditions on the pricing parameters, the supply chain under the channel member’s fairness concerns can be coordinated through option contract. However, irrespective of the channel members being fairness-concerned, when the channel is coordinated, the supplier cannot realize its optimal pricing policy. Additionally, the stronger fairness concern of retailer and the mild fairness concern of supplier leads the channel to approach the pricing policy of the coordinated channel. Furthermore, the fairness sensitivity of the retailer/supplier has a positive/negative impact on the overall supply chain performance. The results are demonstrated with the help of a numerical example.
The demand for relief supplies after sudden disasters strike is growing at an explosive rate. Because of high uncertainty and time urgency, governments usually stockpile a certain amount of relief supplies in advance of potential disasters. Hence governments face inventory risk and stock-out risk in the relief supply management. The stored relief supplies by governments are wasted if no disaster happens. If the quantity of stored relief supplies is not sufficient, stock-out risk will occur. In reality, governments may purchase relief supplies from multiple suppliers, rather than from a supplier. However, few studies have been undertaken with respect to the decision of what quantity of relief supplies should be stockpiled by governments, and how much inventory to pre-position at each supplier. To solve the problem, we introduce option contracts into relief supply management by considering this system as a relief supply chain with one government and multiple suppliers. A relief supplies purchasing (RSP) model via option contracts is established. The government’s optimal order quantity of relief supplies and each supplier’s pre-positioning quantity of relief supplies are derived. We uncover the condition that the relief supply chain coordination is achieved. Under channel coordination, the RSP model can improve the total quantity of relief supplies stockpiled for sudden disasters, and reduce the government’s inventory risk when compared to the government single pre-positioning model. Meanwhile, we give the condition that the government and all suppliers achieve a multi-win situation. Finally, we broaden our model and attain a common interval in which both supplier 1 and supplier 2 are willing to engage. The research findings provide some managerial insights for government’s purchasing strategies.
Framework agreements (FAs) are commonly used by relief organizations to cooperate with suppliers to pre‐position relief items. Many Chinese local authorities with disaster responding experience choose a specific type of FA, the fixed framework agreement (FFA), which contains fixed terms for item quality, quantity, price, and delivery lead time. These FFAs, however, do not fully motivate suppliers to further improve the effectiveness of a humanitarian logistics (HL) operation. We suggest using a bonus contract as a supplemental agreement to FFAs to incentivize suppliers to reduce delivery lead times. We develop a performance measurement model using deprivation level functions (DLFs) to measure effectiveness, efficiency and cost‐effectiveness of an HL operation. With this model, we quantify the performance of an FFA with and without bonus contract and study the feasibility and optimality of the bonus contract. A case study on an FFA observed in practice is used to illustrate our methodology. The results show that the bonus contract can be both practical and capable of improving the performance of an HL operation.
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Relief supply management is one of the most important parts in emergency management. Because of high uncertainty and time urgency, relief supplies should be purchased in advance as stock before disasters occurs. The purchasers of relief supplies are mainly governments. As in commercial supply management, governments face inventory risk and stock-out risk in their management of relief supplies. Stock-out risk can be solved by spot markets and in-kind donations, while there is no good solution to inventory risk. It is highly possible that pre-reserved relief supplies are not used within their validity periods because of the low frequency of disasters, which causes huge losses to governments. To solve the problem, we introduce a put option contract into relief supply management by considering the system as a relief supply chain. We explore the characteristics of the put option contract and prove that it can provide coordination of the relief supply chain. Furthermore, we make comparison between the put option contract, wholesale price contract and buyback contract under the same conditions to show the superiority of the put option contract. Meanwhile, we also present the condition that both a government and a supplier conduct transactions and achieve a win-win situation based on the put option contract.
This paper demonstrates the mathematical equivalence between two recently proposed reference effect formulations for the newsvendor problem and then extends them to a competitive setting. The analysis of the resultant game shows that the heterogeneity of reference effects can explain multiple regularities observed in recent experimental studies of newsvendor competition. In particular, our model explains the main experimental finding that one newsvendor tends to ignore the policy of its competitor. Other experimental observations such as profit disparity, underordering in a high margin scenario, and overordering when there is no expected overflow can all be attributed to the heterogeneity of reference effects in our model’s equilibrium. In addition to explaining these observations, our model also produces a number of new testable hypotheses regarding the competitive newsvendor behavior.
Nowadays, coordination of relief items procurement in humanitarian logistics has become one of the main challenges of disaster management. In this paper, we utilize a quantity flexibility contract (QFC) to coordinate ordering activities in a three-echelon relief chain. This multi-echelon supply chain consists of a relief organization (i.e., NGO), one relief item supplier, and affected areas. In the proposed QFC, initially, the relief organization places an order before the disaster strikes and is committed to purchasing the initial quantity no less than a previously agreed amount. On the other hand, the supplier is committed to providing up to a certain amount above the initial order, if needed. Expected profit functions of relief chain members include transportation cost, inventory cost, the manufacturing cost of relief items, shortage cost, salvage value, and satisfaction level of affected areas. Our findings show that, under demand uncertainty, the proposed QFC not only prevents significant losses at relief organization but also enhances satisfaction level of the affected areas. Finally, the performance of the proposed coordination model is examined via various numerical experiments and managerial insights are extracted.
Humanitarian organizations typically preposition relief items in strategic locations whose optimum levels are affected by the amounts of pre-disaster contractual agreements and post-disaster procurements. To account for these interrelationships, this paper proposes a novel two-stage scenario-based mixed fuzzy-stochastic programming model for integrated relief pre-positioning and procurement planning based on a quantity flexibility (QF) contract under a mixture of uncertain data. An effective multi-step solution method is also devised to solve the problem in real-sized instances. Applicability of the proposed model is examined through a real case study. Finally, a number of sensitivity analyses are conducted to provide helpful managerial insights.
Timely and adequate supply of vaccines in disastrous situations has a key role in controlling communicable diseases. This paper develops a specific option contract for proactively provisioning required vaccine doses from two suppliers (a main and a backup). The model aims to minimize the procurement and social costs using the SIR epidemic model. A novel hybrid solution procedure is developed using the optimal control theory, Stackelberg game model and nonlinear programming approaches. To evaluate the performance of the developed solution method, a number of numerical examples are presented and their results are discussed.
We study a loss averse competitive newsvendor problem with anchoring under prospect theory. We consider two demand-splitting rules for quantity competition, including proportional demand allocation and demand reallocation. We characterize the optimal order quantity decisions under both demand rules. We find that the newsvendor's order quantity is decreasing with the degree of loss aversion and the value of the anchor. Compared with an integrated risk-neutral supply chain, a positive anchor always leads to inventory understocking, whereas a negative anchor may result in a serious overstocking. Under competition with homogeneous newsvendors, competition always makes newsvendors order more, which does not necessarily lead to a loss of profit. For newsvendors with a high anchor, competition helps to prevent understocking caused by the anchoring effect, which leads to an increase in profit. For newsvendors with a low anchor, competition exacerbates overstocking, which results in a loss of profit. Under competition with heterogeneous newsvendors, a newsvendor with a higher degree of loss aversion or with a higher anchor adopts a more conservative strategy (i.e. choose a lower order quantity), which results in a smaller market share.
This paper considers a single-product, single-period inventory management problem in which the retailer is loss averse with adaptive quantity-oriented reference points. The impact of the loss degree and the quantity-oriented reference point is investigated jointly on the optimal ordering quantity and the profit maximization of the retailer. It shows that there exists a unique optimal order quantity while maximizing the expected utility. The optimal solution can be readily determined via a numerical approach, and it has explicit forms for some special distribution functions. The loss-averse retailer's order quantity is always less than loss-neutral decision maker's when the reference dependency is under consideration. However, the optimal order quantity of the loss-averse system with quantity-oriented reference point is more than, equal to or less than that of the classical system. Furthermore, the structural properties and sensitivity analysis of the optimal solution are addressed. Several important managerial insights are presented by extensive numerical experiments, and finally, some conclusions and future work are given.
In this paper, we study the optimal order quantity in the loss-averse newsvendor model with backordering. We first obtain the optimal order quantity to maximize the expected utility. To hedge against the risk arising from the uncertainty of market demand, we introduce the Conditional Value-at-Risk(CVaR) measure and derive the optimal order quantity to maximize the CVaR objective about utility. It is found that the optimal order quantity with the CVaR objective is decreasing in the confidence level, and thus is smaller than the optimal order quantity to maximize the expected utility. It is proved that under the optimal order quantity with the CVaR objective, the loss-averse newsvendor's expected utility is decreasing in the confidence level. It further confirms that high risk implies high return and low risk comes with low return.
Risk neutral assumption in the newsvendor problem under recourse option predicts the order quantity insensitive to the selling price; and, risk aversion modeled through common utility functions gives decreasing order quantity with increasing selling price. In this paper, we consider loss aversion to model the choice preference of the decision maker in the newsvendor problem under recourse option, and prove that loss aversion predicts the rational ordering behavior of the newsvendor with respect to the changes in price and cost parameters. Further, we find that loss aversion can significantly improve the performance of utility function based models in predicting the rational behavior. We extend the analysis to a supply chain setting and establish coordinating contract between a loss averse retailer facing a newsvendor problem and a risk neutral supplier under recourse option. We find that the contract parameter does not depend on the loss aversion; hence, the same contract can be implemented with retailers with different levels of loss aversion.
When a decision maker encounters a decision making problem of uncertain outcomes, he/she tends to estimate the so called certainty equivalent of the anticipated rewards, which resembles the benefit measure per unit increase in the expected payoff. Such certainty estimation results in underestimation and sometimes overestimation of the possible rewards. Hence, when two decision problems of uncertain outcomes are to be compared, the decision maker may unintentionally prefer one alternative over another due to the risk imposed by the uncertainty of the outcomes, while in reality the best choice is the other way around. In this paper, we present a model to resolve the complications of overestimation/underestimation of an individual's certainty equivalent by introducing a stochastic non-excepted utility model that adds an error component to the estimated certainty equivalent by the decision maker. The error distribution is optimised via training datasets. By stochastic representation of the expected utility and its corresponding certainty equivalent, we can resolve the decision making situations when the decision maker is risk averse/seeker. To demonstrate the merits of the presented model, different datasets are tested; the model shows a remarkable prediction capability of human choices under risk and uncertainty.
Overconfidence is one of the most consistent, powerful, and widespread cognitive biases affecting decision making in situations characterized by random outcomes. In this paper, we study the effects and implications of overconfidence in a competitive newsvendor setting. In this context, overconfidence is defined as a cognitive bias in which decision makers behave as though the outcome of an uncertain event is less risky than it really is. This bias unequivocally leads to a lower expected profit for a newsvendor that does not compete on inventory availability. Nevertheless, it can be a positive force for competing newsvendors. Indeed, we find that when the product’s profit margin is high, overconfidence can lead to a first-best outcome. In a similar vein, we also show that the more biased of two competing newsvendors is not necessarily destined to a smaller expected profit than its less biased competitor.
This paper was accepted by Manel Baucells, decision analysis.
This paper studies supply chain coordination via revenue sharing contracts in two different supply chain structures. First, for a three-echelon supply chain with a loss-averse retailer, a loss-neutral distributor, and a loss-neutral manufacturer, we derive the three players’ optimal policies, and find that compared with a loss-neutral scenario, the loss-averse retailer gains fewer profits and a lower utility. Additionally, compared with the loss-neutral scenario, the loss-averse retailer orders less when it faces a high overage cost and orders more when it faces a high shortage cost. Second, for a two-echelon supply chain consisting of a loss-averse retailer and a loss-neutral distributor, we provide the two players’ optimal policies. Third, we derive coordination conditions for the two supply chain structures, and quantify the differences between the three-echelon supply chain and the two-echelon supply chain. Furthermore, we find that Pareto improvement can be achieved under revenue sharing contracts.
Customers are averse to disappointment that arises when economic outcomes fall short of expectations. In this study, we study a two‐period model in which the firm may create rationing in either period. In the anticipation of possible disappointment due to stock‐outs, strategic customers decide when to purchase and the firm determines the prices and rationing levels in each period. We explore the impact of disappointment aversion on customers' strategic purchasing behavior and the firm's pricing and rationing decisions. Without disappointment aversion, it is optimal for the firm to adopt a uniform pricing policy without rationing. However, when strategic customers are averse to disappointment, a firm may be able to increase profits with an appropriate level of rationing. We analyze both the mark‐up and mark‐down policies. We show that, in a mark‐down scenario, the firm always benefits from disappointment aversion behavior by using an appropriate level of rationing in a low‐price period. However, in a mark‐up scenario, whether it is beneficial for the firm to induce disappointment aversion behavior depends on how customers frame payoffs in different periods when forming utilities. Particularly, when customers compartmentalize payoffs in different periods to form utilities, the firm should not induce disappointment aversion behavior.
In this study, we consider the supplier selection problem of a relief organization that wants to establish framework agreements (FAs) with a number of suppliers to ensure quick and cost-effective procurement of relief supplies in responding to sudden-onset disasters. Motivated by the FAs in relief practice, we focus on a quantity flexibility contract in which the relief organization commits to purchase a minimum total quantity from each framework supplier over a fixed agreement horizon, and, in return, the suppliers reserve capacity for the organization and promise to deliver items according to pre-specified agreement terms. Due to the uncertainties in demand locations and amounts, it may be challenging for relief organizations to assess candidate suppliers and the offered agreement terms. We use a scenario-based approach to represent demand uncertainty and develop a stochastic programming model that selects framework suppliers to minimize expected procurement and agreement costs while meeting service requirements. We perform numerical experiments to understand the implications of agreement terms in different settings. The results show that supplier selection decisions and costs are generally more sensitive to the changes in agreement terms in settings with high-impact disasters. Finally, we illustrate the applicability of our model on a case study.
We investigate a one-period two-echelon supply chain composed of a risk-neutral supplier that produces short life-cycle products and a loss-averse retailer that orders from the supplier via option contracts and sells to end-users with stochastic demand in the selling season. When a single retail season begins, the retailer can obtain goods by purchasing and exercising call options. We derive the loss-averse retailer's optimal ordering policy and the risk-neutral supplier's optimal production policy under these conditions. In addition, we find that the loss-averse retailer may order less than, equal to, or more than the risk-neutral retailer. Further, we show that the loss-averse retailer's optimal order quantity may increase in retail price and decrease in option price and exercise price, which is different from the case of a risk-neutral retailer. Finally, we study coordination of the supply chain and show that there always exists a Pareto contract as compared to the non-coordinating contracts.
The paper argues that welfare economic principles must be incorporated in post-disaster humanitarian logistic models to ensure delivery strategies that lead to the greatest good for the greatest number of people. The paper’s analyses suggest the use of social costs—the summation of logistic and deprivation costs—as the preferred objective function for post-disaster humanitarian logistic models. The paper defines deprivation cost as the economic valuation of the human suffering associated with a lack of access to a good or service. The use of deprivation costs is evaluated with: a review of the philosophy and economic literature to identify proper foundations for their estimation; a comparison of different proxy approaches to consider human suffering (e.g., minimization of penalties or weight factors, penalties for late deliveries, equity constraints, unmet demands) and their implications; and an analysis of the impacts of errors in estimation. In its final sections, the paper conducts numerical experiments to illustrate the comparative impacts of using the proxy approaches suggested in the literature, and concludes with a discussion of key findings.
Relief material management which aims to reduce the impact of disaster and maintain social stability is of great importance for nonprofit organization (NPO) such as government, department of civil affair or Red Cross. However, the research of efficiency and performance on this field has long been ignored. In order to improve the efficiency and performance of the relief material management, we apply the supply chain management method into this field. Considering the relief material management system as a supply chain with one buyer and one supplier, we introduce the option contract mechanism into relief material supply chain management. With reasonable assumptions, we design an option contract with two delivery steps, and build an option pricing model with binominal lattice to estimate the different values of the same option contract for both members of supply chain. Furthermore, we analyze the impacts of the different parameters (such as the ratio of inventory, subjective probability of disaster, etc.), on the supply chain and its members in detail. The numerical example presented at last demonstrates that, with two delivery steps, there is a feasible price range of option contract which makes both members of relief material supply chain profitable and willing to conduct the transaction with option contract.
Thirty-two college students rated the “risk” inherent in playing each of 27 gambles. The results indicated that perceived risk was determined primarily by a gamble’s probability of losing. The variance of a gamble had little influence upon its riskiness. The results were contrasted with those of a previous experiment in which Ss rated the attractiveness, rather than the riskiness, of these same bets.
Government agencies, not-for-profit organizations, and private corporations often assume leading roles in the delivery of supplies, equipment, and manpower to support initial response operations after a disaster strikes. These organizations are faced with challenging logistics decisions to ensure that the right supplies (including equipment and personnel) are in the right places, at the right times, and in the right quantities. Such logistics planning decisions are further complicated by the uncertainties associated with predicting whether or not a potential threat will materialize into an emergency situation. This paper introduces newsvendor variants that account for demand uncertainty as well as the uncertainty surrounding the occurrence of an extreme event. The optimal inventory level is determined and compared to the classic newsvendor solution and the difference is interpreted as the insurance premium associated with proactive disaster-relief planning. The insurance policy framework represents a practical approach for decision makers to quantify the risks and benefits associated with stocking decisions related to preparing for disaster relief efforts or supply chain disruptions.
We investigate the role of options (contingent claims) in a buyer-supplier system. Specifically using a two-period model with correlated demand, we illustrate how options provide flexibility to a buyer to respond to market changes in the second period. We also study the implications of such arrangements between a buyer and a supplier for coordination of the channel. We show that, in general, channel coordination can be achieved only if we allow the exercise price to be piecewise linear. We develop sufficient conditions on the cost parameters such that linear prices coordinate the channel. We derive the appropriate prices for channel coordination which, however, violate the individual rationality constraint for the supplier. Contrary to popular belief (based on simpler models) we show that credit for returns offered by the supplier does not always coordinate the channel and alleviate the individual rationality constraint. Credit for returns are useful only on a subset of the feasibility region under which channel coordination is achievable with linear prices. Finally, we demonstrate (numerically) the benefits of options in improving channel performance and evaluate the magnitude of loss due to lack of coordination.
The anchoring effect is one of the most robust cognitive heuristics. This paper reviews the literature in this area including various different models, explanations and underlying mechanisms used to explain anchoring effects. The anchoring effect is both robust and has many implications in all decision making processes. This review paper documents the many different domains and tasks in which the effect has been shown. It also considers mood and individual difference (ability, personality, information styles) correlates of anchoring as well as the effect of motivation and knowledge on decisions affected by anchoring. Finally the review looks at the applicants of the anchoring effects in everyday life.
Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. This paper uses loss aversion to model manager's decision-making behavior in the single-period newsvendor problem. We find that if shortage cost is not negligible, then a loss-averse newsvendor may order more than a risk-neutral newsvendor. We also find that the loss-averse newsvendor's optimal order quantity may increase in wholesale price and decrease in retail price, which can never occur in the risk-neutral newsvendor model.
Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)