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The component procurement problem for the loss-averse manufacturer with spot purchase

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  • Shen, Houcai
  • Pang, Zhan
  • Cheng, T.C.E.

Abstract

This paper studies the purchasing behaviour of a loss-averse engineer-to-order manufacturer, who purchases a key component for his final product from a supplier under a single-wholesale-price contract with spot purchase opportunities, where both the product demand and the component spot price are uncertain. Through newsvendor type of models, we analyze several key issues, including the effects of the manufacturer's loss aversion, and the effects of demand and spot price uncertainties on the manufacturer's decision behaviour. We find that the purchasing behaviour of the loss-averse manufacturer differs from those of the risk-neutral and risk-averse ones. Specifically, we identify some sufficient conditions under which the loss-averse manufacturer may purchase a larger order quantity in advance when demand becomes more uncertain or when the price becomes more uncertain. We also discuss the two-wholesale-price contract and show that fixing the emergency supply price may lead to a smaller order quantity.

Suggested Citation

  • Shen, Houcai & Pang, Zhan & Cheng, T.C.E., 2011. "The component procurement problem for the loss-averse manufacturer with spot purchase," International Journal of Production Economics, Elsevier, vol. 132(1), pages 146-153, July.
    • Handle: RePEc:eee:proeco:v:132:y:2011:i:1:p:146-153
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    3. Yan, Nina & Xu, Xun & Huang, Wenyi, 2021. "Supplier's capacity investment strategy with factoring finance," International Journal of Production Economics, Elsevier, vol. 238(C).
    4. Vipin, B. & Amit, R.K., 2017. "Loss aversion and rationality in the newsvendor problem under recourse option," European Journal of Operational Research, Elsevier, vol. 261(2), pages 563-571.
    5. Sun, Xuting & Chung, Sai-Ho & Choi, Tsan-Ming & Sheu, Jiuh-Biing & Ma, Hoi Lam, 2020. "Combating lead-time uncertainty in global supply chain's shipment-assignment: Is it wise to be risk-averse?," Transportation Research Part B: Methodological, Elsevier, vol. 138(C), pages 406-434.
    6. Xiang Li & Yongjian Li, 2016. "On lot-sizing problem in a random yield production system under loss aversion," Annals of Operations Research, Springer, vol. 240(2), pages 415-434, May.
    7. Liu, Wei & Song, Shiji & Wu, Cheng, 2013. "Impact of loss aversion on the newsvendor game with product substitution," International Journal of Production Economics, Elsevier, vol. 141(1), pages 352-359.
    8. Ma, Lijun & Zhao, Yingxue & Xue, Weili & Cheng, T.C.E. & Yan, Houmin, 2012. "Loss-averse newsvendor model with two ordering opportunities and market information updating," International Journal of Production Economics, Elsevier, vol. 140(2), pages 912-921.
    9. Li, Xiang & Qi, Xiangtong & Li, Yongjian, 2021. "On sales effort and pricing decisions under alternative risk criteria," European Journal of Operational Research, Elsevier, vol. 293(2), pages 603-614.
    10. Goudarzi, Fatemeh (Sahar) & Olaru, Doina & Bergey, Paul, 2023. "Beyond risk attitude: Unpacking behavioral drivers of supply chain contracts," International Journal of Production Economics, Elsevier, vol. 255(C).
    11. Cannas, Violetta Giada & Gosling, Jonathan, 2021. "A decade of engineering-to-order (2010–2020): Progress and emerging themes," International Journal of Production Economics, Elsevier, vol. 241(C).

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