Retailers’ optimal ordering policies for a dual-sourcing procurement
| DOI | https://doi.org/10.1108/IMDS-07-2022-0458 |
| Published date | 09 February 2023 |
| Date | 09 February 2023 |
| Pages | 1052-1072 |
| 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 |
Retailers’optimal ordering policies
for a dual-sourcing procurement
Xinsheng Xu
College of Science, Binzhou University, Binzhou, China
Ping Ji
Department of Industrial and Systems Engineering,
The Hong Kong Polytechnic University, Hung Hom, China, and
Felix T.S. Chan
Department of Decision Sciences, Macau University of Science and Technology,
Macau, China
Abstract
Purpose –Optimalordering decisionfor a retailerin a dual-sourcingprocurementis an important researcharea.
The main purpose of this paper is to explore a loss -averse retailer’s ordering decision in a dual-sourcing problem.
Design/methodology/approach –For a loss-averse retailer, the study obtainsthe optimal ordering decision
to maximize expected utility. Based on sensitivity analysis, the properties of the optimal ordering decision are
well discussed.
Findings –Under the optimal ordering quantity that maximizes expected loss aversion utility, the relevant
expected profit of a retailer turns to be smaller under a bigger loss aversion coefficient.For this point, a retailer
needs to balance between expected loss aversion utility maximization and expected profit maximization in
deciding the optimal ordering policy in a dual-sourcing problem.
Originality/value –Thispaper reveals the influence of lossaversion on a retailer’s orderingdecision in a dual-
sourcingproblem.Managerial insightsare suggested to devise theoptimal ordering policyfor retailers in practice.
Keywords Optimal ordering policy, Spot procurement, Loss-averse, Expected loss aversion utility
Paper type Research paper
1. Introduction
As is well-known to all, life cycles of commodities become shorter and shorter and the
updating of products becomes more frequently. To maintain the relationship with the
supplier, retailers in practice usually order commodities from one supplier. For traditional
food supply chains in China, retailers usually place orders for producing food with a single
supplier (Mamoudan et al., 2022). Another example concerns the smartphone industry. In
2019, Huawei, the biggest smartphone producer in China, procured the Organic Light-
Emitting Diode (OLED) screens mainly from the Beijing Oriental Enterprise (BOE) company
(Ma and Wang, 2022). With the development of e-commerce, retailers often purchase the
commodities from multiple channels to mitigate potential risks and relevant losses
nowadays. For instance, many firms in reality often first order commodities in a supply
contract to maintain the inventory to a given level, and then prepare to purchase commodities
in spot markets if the realized market demand exceeds the inventory. Such a dual-sourcing
procurement could effectively reduce procurement risks and losses for firms to procure
commodities. In 2019, 70% of the liquefied natural gas in Japan was traded under supply
contracts, while the remaining of 30% is procured in spot markets. Canon and Nikon, the
IMDS
123,3
1052
This work is supported by the National Natural Science Foundation of China (Project No.71871026), the
Taishan Scholars of Shandong Province (Project No.tsqn202103120), Natural Science Foundation of
Shandong Province (Project No.ZR2017MG002), and a grant from The Hong Kong Polytechnic
University of China (Project No. UAHR).
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 6 August 2022
Revised 11 November 2022
Accepted 27 December 2022
Industrial Management & Data
Systems
Vol. 123 No. 3, 2023
pp. 1052-1072
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-07-2022-0458
main producers of professional Single-Lens Reflex (SLR) cameras, often procure normal-sized
digital processing chips from traditional supply contacts as well as spot markets (Ma et al.,
2021). However, an important problem in the dual-sourcing procurement is that, how to
decide the ordering decision in a supply contact to balance procurement costs in the supply
contract and spot market. On the one hand, it is not essential for a retailer to order items when
spot price is relatively low as commodities can be procured by spot markets? On the other
hand, if the spot price is relatively high, a retailer needs to order more items in a supply
contract. Therefore, it is very significant for a retailer to make the ordering decision in a
supply contract in a dual-sourcing procurement.
As stated above, the study on a retailer’s optimal procurement policy in a dual-sourcing
problem hasreceived more and more attention.Specifically, the existingliterature on this topic
mainly includesthe following streams. The first streamis related to the optimal conditionsfor
obtaining a retailer’s best procurement policy in a dual-sourcing procurement. The related
literature includes but is not limited to Mart
ınez-de-Alb
eniz and Simchi-Levi (2005),Wu and
Kleindorfer (2005),Haks€
oz and Seshadr i (2007),Shi et al.(2011),Fu (2015),Inderfurth et al.
(2018),Tezel et al.(2020),Wu et al.(2021),Luo et al.(2021)and Xu et al. (2022a). The second
stream concernsthe relationship between a retailer’soptimal ordering decisionand variations
of the market pri ces (e.g. the retail price ). Related studies can be fou nd in Lau et al.(2007),Chen
et al.(2009),Wang and Webster (2009),Xuet al.(2011),Polak and Privault (2018),Wang and
Chen (2022)and so on. The existing literatureshows that a retailer’s optimalordering quantity
can be influenced by the variations of the market prices. The retailer should consider such
variations in the optimal ordering decision. The third stream is on computing a retailer’s
optimalprocurement policy by devisingnumerical algorithms in a dual-sourcingproblem. The
related studieson this subject can be found in Fu et al.(2010),Fu et al.(2012)
,Lee et al.(2013),
Merzifonluoglu(2015),Wan and Chen (2018),Heidaryand Aghaie (2019),Bian et al. (2020) and
Gao et al. (2021). It should be pointed out that the existing study concentrates mainly on the
maximization of expected profit in a dual-sourcing problem. Accordingly, it has been verified
thata dual-souringprocurementby supply contracts and spot buyingcan effectively improvea
retailer’s expected profit (Luo et al., 2015;Peng et al., 2021;Xu et al., 2022b).
In general, the existing literature focuses mainly on maximizing a retailer’s expected profit
in a dual-sourcing procurement from supply contracts and spot market. However, some
related papers showed that the retailers in practice often select the ordering quantities that
are different from the above expected profit maximization ordering quantity. In addition, it is
reported that such a deviation is related to a retailer’s loss aversion preference (Schweitzer
and Cachon, 2000). For example, the related study showed that a news vendor who is with
loss aversion preference may order more or fewer items than a news vendor who is with loss
neutrality preference (Wang and Webster, 2009). Further, Lee et al. (2015) verified that a
buyer’s optimal option reserving decision in an option contract can be heavily influenced by
the loss aversion behavior. Then, a great number of papers have been devoted to studying a
loss-averse retailer’s procurement decision (Herweg, 2013;Neumann and Bockenholt, 2014;
Xu et al., 2017,2018,2019;Li and Li, 2018;Liu et al., 2020;Zhang et al., 2022).
As stated above, the existing literature shows that the loss aversion preference has an
important influence on a retailer’s optimal ordering decision. However, to the best of our
knowledge,little attentionhas been paid to a loss-averseretailer’s optimalordering decisionin a
dual-sourcingproblem. As there are more uncertain factorswhich always bring heavy losses,
revealing the loss aversion effect on a retailer’s optimal order decision in a dual-sourcing
problem turnsto be an interesting researchtopic. In view of the issue, the mainpurpose of this
paper is to study the loss aversion effect on a retailer’s optimal ordering decision in a
dual-sourcingproblem. Specifically, we aim to answerthe following issues: (1) The differences
between the optimal ordering decisions of a loss-neutral retailer and a loss-averse retailer. (2)
The changing direction of the optimalordering decision when a retailerbecomes more or less
Dual-sourcing
procurement
1053
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