Stockout aversion in retailing supply chain using newsvendor models

The sophisticated behaviour of the customers, availability of variety of products, stiff competition and product obsolescence results in limited selling period and uncertainty in demand for a product. In that context, the newsvendor models have found increasing applicability in supply chain management (SCM). This paper investigates a newsvendor model with alternative risk preference in which vendor is averse to stockouts in order to avoid dissatisfaction of customers, cost of emergency order and lost sales. We obtain unique optimal solution of the problem and study its various properties. Since newsvendor problem ignores the effect of other vendors in the supply chain, we study a supply chain system with risk neutral wholesaler selling its product to several vendors with stockout averse preferences competing for inventory. We establish the existence and uniqueness of a pure strategy Nash equilibrium. Then we obtain unique optimal solution and study its characteristics. Finally, our model is illustrated with the help of numerical example.