Impact of Risk Aversion on Optimal Decisions in Supply Contracts with Bidirectional Options

Supply contracts with options have been proposed to provide flexibility in supply chains with high demand uncertainties. In this paper, we consider a flexible supply contract model with bidirectional options in which a risk-averse retailer subject to high uncertain market demand and ordering decisions. We use the Conditional Value-at-Risk, a risk measure commonly used in finance, as a decision criterion and derive the retailer's optimal ordering decisions equations. In particular, we obtain closed-form formulae to describe the retailer's optimal behavior when the demand is uniformly distributed. Numerical examples analyze that how the risk aversion and contract parameters affect the retailer's optimal decisions. We also numerically prove that bidirectional options improve the retailer's profit under risk aversions, compared with the wholesale price contract.