Coordination contracts in a dual-channel supply chain with a risk-averse retailer

Abstract

Dual channels have become popular strategies for manufacturers due to the development of innovative selling platforms. The examples in practice also show that the lack of relationship management, such as cooperation and sharing, may cause an unsustainable supply chain performance. However, previous studies on coordination of dual-channel supply chains always focus on the contribution to profits and neglect the sustainability of relationship development between channel members. In this paper, we study the coordination of a dual-channel supply chain including a direct channel and a traditional channel. Under the fact that sustainable economy, instead of profit maximization, is the more proper objective in channel members’ decision making, we consider the retailer’s risk exposure and assume the risk degree is also the factor that impacts the decision making. We assume the manufacturer is risk-neutral and the retailer is risk-averse, and measure the risk attitude with Conditional Value-at-Risk (CVaR) approach. We first study four traditional contracts used in single-channel supply chains widely such as revenue-sharing contract, profit-sharing contract, buy-back contract and quantity-discount contract. It is shown that some contracts may not coordinate the system in this case, and their required ranges of risk-averse degree are restrictive under same coordination parameters. Then we propose a risk-sharing contract which could distribute profits between two channel members and coordinate the system under varied risk-averse degrees with a fixed coordination parameter. Finally, we analyze the sensitivity of the direct price, channels’ market shares, product’s substitutability and risk factor on the risk-sharing contract’s coordination effect, thus gaining managerial insights with numerical and sensitivity analysis. The results provide important managerial insights.

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