Inventory strategy of the risk averse supplier and overconfident manufacturer with uncertain demand

Uncertainty in market demand can lead to excess inventory, and the resulting inventory risk has led to different inventory strategies to distribute the risk. There are three inventory strategies: push strategy, pull strategy, and “prebook + at-once” strategy, depending on whether the inventory risk is borne by one or both of the supplier or manufacturer. This paper examines the optimal decisions and the strategy preferences of a risk averse supplier and an overconfident manufacturer. The results show that the supplier's risk aversion always reduces the number of products supplied and the profit of participants under the pull strategy, while the manufacturer's overconfidence may bring better profit and higher order quantity under the push strategy. Moreover, the degree of risk aversion of the supplier would affect whether the “prebook + at-once” strategy can realize sharing of inventory risk between the supplier and the manufacturer. Concerning the preference for inventory strategy, the supplier and the manufacturer cannot achieve a win-win situation on any strategy other than the push strategy under certain conditions. Finally, we also investigate the impact of three key factors, including risk attitude, market conditions, and contract terms, on the participants' optimal decisions and profits.