Newsvendor's supply chain design considering non-survival risks

Abstract

Purpose: We consider the long-term survival of the newsvendor's supply chain (SC). In this regard, the main contribution of this paper is to identify and analyze two risks that threaten it, both derived from the random nature of the demand, which is inherent in the definition of the newsvendor problem (NVP). These are the risk of a decrease in demand due to unsatisfied demands because of the lack of stock and the risk of bankruptcy of the vendor due to insufficient monetary inflows.

Design/methodology/approach: We present a mathematical model of the newsvendor's supply chain with three components: the Producer (P), the Vendor (V) and the Consumers (C). The model takes into account the relation between the components of the SC, the income and operative costs of P and V and the initial funds of V. We solve the model considering several assumptions related with the cost, the initial funds and the demand of C. 

Findings: We identify and analyze two risks that threat the continuity of the newsvendor’s supply chain in the long term. The first comes from the decreasing in the demand derived from the low level of service that can result from optimizing the joint income of P and V without considering a level of service constraint, which is an essential characteristic of any system of inventory management and has deserved little attention in the literature on the NVP. In fact, an unacceptable low level of service is hardly compatible with the assumption that the law of the demand does not change throughout the time. The second risk is that of V’s bankruptcy due to insufficient monetary inflows, what can happen even if the expected value of V's daily net income is positive. Indicators are proposed to measure these risks and procedures to calculate them.

Practical implications: First, in the design of the Supply Chain, under conditions similar to that of the NVP, the decision maker must compare the options of resort or not to V, considering the consequences on income and risk. Second, the objective of coordinating the SC, understood as the maximization of the joint income of P and V, has the limitation of not taking into account that the consumers, which are also part of the SC, can leave it when they deem that the service is unsatisfactory. Third, P must be aware, when setting the parameters of the SC, that its decisions determine those of V and their consequences; therefore, P must take into consideration the economic survival of V, in order to avoid disruptions in the SC and the negative consequences they imply for P itself.

Originality/value: Our approach is different from the most usual, which is focused on the criteria and the optimization procedures of the vendor. Instead, we consider the whole SC, including one essential component of it, namely, the consumers.