Quick Response in Supply Chains with Stochastically Risk Sensitive Retailers*

Quick response is a supply chain practice that can help improve operations by responding quickly to market changes. In particular, when retailers are perfectly rational and risk neutral, quick response is known to be a highly beneficial strategy to the retailers. However, in practice, retailers may possess different kinds of unstable risk preferences, which include risk-averse and risk-seeking attitudes. Thus, retailers may be stochastically risk sensitive. In this article, we consider all these factors simultaneously and explore how the retailer's stochastic risk preference affects the values of quick response to the supply chain and its members. Among various findings, we show that quick response is always beneficial to the supply chain when the retailer is stochastically risk sensitive. In most cases, we demonstrate that if the retailer is more risk averse (risk seeking) stochastically, the retailer is benefited more, whereas the manufacturer suffers a smaller profit loss (a bigger profit loss), under quick response. We prove that different commonly used supply chain contracts can achieve robust Pareto improvement in the supply chain. We also uncover that if the manufacturer ignores the retailer's stochastic risk preference, the achievability of Pareto improvement by contracts will be negatively affected.