A Study On Insurance Contract And Ordering Strategies In A Supply Chain With Product Recall

With the advancement of globalization and outsourcing,global sourcing has been widely used to retain cost competitiveness at the cost of product reliability,and therefore the product recall risk which significantly affects the supply chain performance is becoming a fairly challenging issue in supply chain management in various industries,like the food and pharmaceutical industry,particularly in the supply chain with uncertain demand.Existing literature has shown that risk sharing contract could improve the supply chain performance,and the insurance contract is such a type of risking sharing contract.As insurance contract is widely used to manage risk in practice,in this study,considering a supply chain with product recall which consists a supplier and a manufacturer,we aim to investigate the impact of supply chain linear insurance contract on the manufacturer's optimal ordering strategies and profit,particularly the supply chain performance,when she is faced with the product recall risk.First,considering a supply chain consisting of a supplier and a manufacturer,we investigate the ordering decision under supply chain insurance contract and the optimal insurance decision which can coordinate the supply chain when the manufacturer is faced with uncertain market demand and product recall risk.We show that the supply chain insurance contract can enhance the manufacturer's optimal ordering quantity and profit,and there exists an optimal and unique insurance contract which can coordinate the supply chain,while the product recall probability,market size and market volatility have significant effects on the optimal insurance charge and optimal ordering quantity.Specifically,the product recall probability,market size or market volatility has an inverted U-shaped effect on the optimal insurance premium under supply chain coordination.However,with the increase of the product recall probability,market volatility or the ratio of loss that the manufacturer bearing,the optimal ordering quantity is decreased,while with the increase of market size,the optimal ordering quantity is increased.Second,using game theoretical approach and nonlinear optimization methodology,in a decentralized supply chain with product recall,the optimal ordering and linear insurance contracting strategies are optimized.We find that the optimal ordering strategy depend the product recall probability and the linear insurance premium rate only.Without considering the supplier's profit constraint,when the linear insurance premium rate is small,the optimal ordering quantity is infinite,and when both the linear insurance premium rate and the product recall probability is large enough,the optimal ordering strategy is no ordering,otherwise,there exists a unique optimal ordering quantity with closed-form expression to maximize the manufacturer's profit.Based on the concavity of profit functions,we find the optimal linear insurance premium rate depends on the product recall probability and the insurance coverage of the linear insurance contract.When both the product recall rate and the insurance coverage of the linear insurance contract is small,or when the product recall rate is large but the insurance coverage is in a proper range,the manufacture will choose the linear insurance contract to improve the profit and the supplier will accept the linear insurance contract as well.Otherwise,the manufacturer prefers to choose the traditional wholesale contract or the supplier will prefer to refuse the linear insurance contract.Finally,considering the supplier through product quality efforts to reduce the product recall probability with uncertain market demand,the manufacturer transfers product recall costs by supply chain linear insurance contract,and discusses the reaction of the supply chain members and the optimal strategy.The study reveals that the optimal linear insurance premium rate depends on the insurance coverage of the linear insurance contract and the coefficient of effort cost.When both are large,the linear insurance contract is most beneficial to the manufacturer.This study provides important insights on designing supply chain insurance contract on managing product recall risk.