With the current heightened global economic uncertainty, retail supply chains are facing unprecedented inventory risk, particularly for micro and small retailers. While the conventional wisdom is that transferring inventory risk to the manufacturer is more conducive to risk mitigation, in reality, does keeping inventory risk on the retailer side provide better incentives and supply chain benefits due to information asymmetry in retail demand and external opportunity risk?

In this regard, HOU Chengfan, an Associate Researcher in the Department of Construction Management and Real Estate of Tongji SEM, has conducted in-depth research on the interaction of risk aversion, information asymmetry and external opportunity risk, and co-authored the paper “Allocating Inventory Risk in Retail Supply Chains: Risk Aversion, Information Asymmetry, and Outside Opportunity’, which was accepted and published by the leading international journal Manufacturing & Service Operations Management.

The core of the paper argues that as the retailing business evolves, the relationship between retailers and manufacturers becomes increasingly complex and the contract design has to consider not only demand uncertainty and differences in risk appetite, but also increasing information asymmetry. In practice, retailers typically have information about their own market demand and external opportunities, while manufacturers have difficulty accessing such information. In addition, retailers often face competitive pressures and opportunity costs from other suppliers when making ordering decisions. In this context, the traditional contractual mechanism based on the assumption of complete or symmetric information is difficult to effectively incentivize retailers to make ordering decisions that are in line with the interests of the supply chain as a whole. To address this issue, this paper adopts a game-theoretic modelling approach to systematically analyze how to design an inventory risk allocation mechanism in the presence of information asymmetry and external opportunity risk in the context of risk-neutral manufacturers and risk-averse retailers.

The study finds that
1) When retailers’ risk aversion is high and external opportunity risk is significant, having retailers bear inventory risk may be superior to having manufacturers bear inventory risk in terms of incentivizing ordering decisions and improving the overall efficiency of the supply chain.
2) When differences in retailers’ risk aversion and external opportunity risk are sufficiently large, having retailers bear inventory risk not only helps manufacturers to earn higher profits, but also completely eliminates information rents under appropriate conditions.
3) This paper further identifies the mechanisms through which product profitability and demand uncertainty affect retailers’ utility, and extends the conclusions from specific risk measures (e.g., CVaR) to general consistency risk measures, improving the theoretical applicability of the model and practical guidance.

This study proposes a revision of the long-standing mainstream view of who should bear inventory risk, enriches the theory of supply chain contract design, and provides an important reference for actual contract selection and design.