Loss-averse buyers' optimal procurement decision in a multi-sourcing under e-commerce surroundings
| DOI | https://doi.org/10.1108/IMDS-12-2021-0757 |
| Published date | 28 June 2022 |
| Date | 28 June 2022 |
| Pages | 1787-1815 |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
| Author | Xinsheng Xu,Ping Ji,Felix T.S. Chan |
Loss-averse buyers’optimal
procurement decision in a
multi-sourcing under
e-commerce surroundings
Xinsheng Xu
College of Science, Binzhou University, Binzhou, China
Ping Ji
Department of Industrial and Systems Engineering,
The Hong Kong Polytechnic University, Hong Kong, China, and
Felix T.S. Chan
Department of Decision Sciences, Macau University of Science and Technology,
Macau, China
Abstract
Purpose –With the rapid development of e-commerce, multi-sourcing with supply contracts and spot buying
has become more and more popular in reality. The main purpose of the paper is to explore a loss-averse buyer’s
optimal procurement policy in a multi-sourcing under e-commerce surroundings.
Design/methodology/approach–The study introduces the loss aversion utility function to characterize the
loss aversion effect and derives a loss-averse buyer’s optimal procurement policy in a multi-sourcing with a
wholesale price contract and spot market.
Findings –A loss-averse buyer could order no items in a wholesale price contract and only needs to replenish
commodities from spot market under certain conditions. In addition, the study shows that spot capacity has
important influences on a loss-averse buyer’s optimal ordering decision in the wholesale price contract.
Originality/value –This is the first paper to study the loss aversion effect on a buyer’s procurement decision
in a multi-sourcing. The results present important managerial insights for a loss-averse buyer to devise optimal
ordering policies in a multi-sourcing under e-commerce surroundings.
Keywords Spot buying, e-commerce, Modeling, Loss aversion, Multi-sourcing
Paper type Research paper
1. Introduction
The development of e-commerce has greatly changed the operations and management of
supply chains in the real world. For example, it is reported that the global retail e-commerce
sales increased by 16.5% and reached up to $3.99 trillion during the year of 2020 [1]. Due to
flexibility and immediacy, spot buying has become more and more popular for buyers’
procurement management in the presence of e-commerce. In 2020, to compete with each other,
both Huawei and Samsung increased their inventories of the DRAM chip by procuring from
spot markets (Ma et al., 2022). However, it is pointed out that there exist certain shortcomings
for spot buying with its increasing popularity in actual practice. For example, over-
dependence on spot buying can bring heavy risks due to the capacity constraint in spot
Buyers’
optimal
procurement
decision
1787
The authors would like to thank the editor and anonymous reviewer for their valuable comments and
suggestions, which help us to improve the quality of the paper greatly. This work was supported by the
National Natural Science Foundation of China (Project No. 71871026) and partially supported by a grant
from The Hong Kong Polytechnic University of China (Project No. UAHR).
Conflicts of interest: The authors declare no conflict of interest in the research.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 24 December 2021
Revised 26 May 2022
Accepted 9 June 2022
Industrial Management & Data
Systems
Vol. 122 No. 8, 2022
pp. 1787-1815
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-12-2021-0757
market or the volatility of spot price. To take advantage of various procurement sources,
multi-sourcing with supply contracts and spot buying has become more and more common
for buyers in reality. In 2019, 70% of the liquefied natural gas in Japan was traded under
supply contracts, while the remaining 30% is procured in spot markets. As another example,
Canon and Nikon, the main producers of professional SLR cameras, often procure normal-
sized digital processing chips from traditional supply contacts as well as spot markets (Ma
et al., 2021). As multi-sourcing becomes more and more common in practice, how to devise the
optimal procurement policy in a multi-sourcing under e-commerce surroundings has
developed into an interesting issue (Wu et al., 2002;Anderson et al., 2017;Sapra, 2017;Xu et al.,
2020;Bian et al., 2020).
For a multi-sourcing, the existing literature focuses mainly on analyzing a buyer’s optimal
procurement policy to maximize expected profit (Wu and Kleindorfer, 2005;Mart
ınez-de-
Alb
eniz and Simchi-Levi, 2005;Fu et al., 2012;Gao et al., 2021;Luo et al., 2021). As an
important criterion in the literature, it is pointed out that expected profit maximization
criterion could not reflect all the sales managers’real procurement decisions in reality. For
example, it is concluded that there is a deviation between buyers’actual procurement
decisions in practice and the optimal procurement policies derived under the expected profit
maximization criterion (Schweitzer and Cachon, 2000). To reveal the reason for such a
deviation, further research found that a buyer’s loss aversion preference could help to explain
the decision bias in the procurement problem (Bostian et al., 2008;Wang and Webster, 2009;
Lau et al., 2014). For example, Wang and Webster (2009) showed that a loss-averse buyer
always orders less than the expected profit maximization quantity when shortage cost is low
and more than the expected profit maximization quantity when shortage cost is high, which
is consistent with the decision bias in the literature. Following this line of research, many
papers are devoted to revealing influences of loss preferences on a buyer’s procurement
decision and the literature indicates that loss aversion preference has important influences on
a buyer’s procurement decision (Wang, 2010;Herweg, 2013;Lee et al., 2015;Xu et al., 2019;
Zhang et al., 2020;Feng and Ye, 2021). However, to the best of our knowledge, there are no
papers addressing the loss aversion effect on a buyer’s multi-sourcing in the presence of
e-commerce. Indeed, there are more uncertain parameters in a multi-sourcing (e.g. the
fluctuation of market demand and variation of spot price), which may bring heavy risks and
losses to a buyer. Then, what is the effect of loss aversion preference on a buyer’s
procurement decision in a multi-sourcing? How should a loss-averse buyer select the optimal
procurement decision in a multi-sourcing when he/she becomes more loss-averse? With the
variation of spot price, should a loss-averse buyer select a bigger or smaller order quantity in
a wholesale price contract? Considering the above issues, this paper investigates the loss
aversion effect on procurement decisions for buyers in a multi-sourcing, which derives
practical and managerial insights to devise optimal procurement policies for loss-averse
buyers in the real world.
Motivated by the issue, a loss-averse buyer’s optimal ordering decision in a wholesale
price contract with a spot replenishment has been studied in this paper. To meet random
market demand of a commodity, a loss-averse buyer could order items in a wholesale price
contract to ensure commodity inventory to a certain level. Then, the buyer could use the
ordered items to meet market demand of the commodity after the sales season arrives. If there
is excess demand that cannot be satisfied by ordered items in the wholesale price contract, the
loss-averse buyer can tap into spot market for an emergent replenishment. The objective of
the paper is to develop a general framework to study influences of loss aversion preference on
a buyer’s optimal procurement decision in a multi-sourcing problem. To characterize the loss
aversion effect, the well-known loss aversion utility function is introduced to quantify a
buyer’s loss aversion utility. To maximize the expected loss aversion utility, we derive the
loss-averse buyer’s optimal ordering decision in the wholesale price contract with a possible
IMDS
122,8
1788
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