Demand For Transmission Risk And Information Risk In The Supply Chain

In a two-echelon supply chain which consists of a downstream retailer and an upstream manufacturer, faced with the uncertainty of market demand, the retailer make ordering decisions after forecasting the real market demand with noisy demand information that he (or she) observes, which will influence the upstream manufacturer’s wholesale price decision-making. The market demand fluctuation and information noises will lead to performance (profit) fluctuations both individually and globly in the supply chain via the retailer’s ordering-decision. The process of "exogenous risks have effects on the retailer’s ordering-decision and then have effects on performance variance of the upstream manufacturer" is named risk transmission in supply chains in this paper.Firstly, this paper tries to build a game model between the node firms (a retailer and a manufacturer) in a supply chain with a wholesale price contract under the condition that demand fluctuation and information noises are uniformly distributed. Further, with the quilibrium, it studies how exogenous risks (demand fluctuations and information noises) are transmitted in the supply chain (i.e., how do exogenous risks (demand risk and information risk) affect the variance of node firms’profits) and discusses the impacts of those exogenous risks on (demand risk and information risk) on their expected profits. Secondly, this paper builds a three-stage game model between an upstream supplier and a downstream manufacturer in a supply chain with a wholesale price contract when futures trading are available, so as to describe how the manufacturer and the supplier strategically interact. Further, via analyzing the equilibrium, it studies the impacts of the change in the futures price on the transmission of demand risk (variance) in supply chains (i.e. how the futures price affects node firms’profit variances and expectations).The results show that,(1) due to interaction of the "judgment effect" and the "decision effect", those exogenous risks (demand risk and information risk) have different effects on the retailer’s variance and expectation of its profit under different demand observations;(2)the manufacturer’s variance of profit increases in the magnitude of the demand fluctuations and decreases in that of information noises, whereas the manufacturer expected performance will be kept unchanged, which implies that those exogenous risks (demand risk and information risk) are transmitted to manufacturer vai the retailer’s strategic ordering (3) in the presence of futures market, the supplier’s variance of profit increases in the change of the futures price and it results in higher profit risk that the supplier bears when the futures price rises,which implies the manufacturer’s ordering-decision makes the exogenous risk (demand risk) transmit to the supplier,the change in the futures price can be used for supply chain managers as an indicator for foreseeing how their profitability and risk are going to change.