Transfer of newsvendor inventory and supply risks to sub-industry and the public by financial instruments

Yick Hin Hung, Yuk On Li, Edwin Tai Chiu Cheng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

7 Citations (Scopus)

Abstract

We consider a two-stage newsvendor model of a sub-industry in which suppliers have short lead-time capacity to produce goods for retailers that are selling non-identical products. We argue that the inventory and supply risks of the newsvendors due to demand uncertainty can be pooled and shared among different supply chains by treating reserved capacity as commodities and trading them as futures and options on futures to hedge the risks. The risks will be further shared with and transferred to the public if speculators are allowed to play the game. We show that this new mechanism of combining operational and financial risk hedging strategies offers industries a new way to more efficiently meet demand and improve profit.
Original languageEnglish
Pages (from-to)567-573
Number of pages7
JournalInternational Journal of Production Economics
Volume143
Issue number2
DOIs
Publication statusPublished - 1 Jun 2013

Keywords

  • Capacity allocation game
  • Options on super capacity futures
  • Risk pooling
  • Super capacity futures

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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