Supply chains facing stockout costs: mean-risk analysis and channel coordination

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Authors: Tijn Fleuren, Yasemin Merzifonluoğlu, İsmail Serdar Bakal, Arnout den Hollander
Cited by: 1
References: 35

Abstract

Stockouts pose persistent challenges to supply chain management, causing profit losses, damaging customer loyalty and reducing future orders. This paper studies risk-based decision models for a dyadic supply chain, incorporating opportunity costs due to stockouts. We first examine unconstrained mean-risk newsvendor models based on variance, standard deviation and semideviation, and establish unified critical-fractile-style optimality conditions analogous to the classical risk-neutral case. These conditions guarantee unique optimal solutions across diverse demand distributions. We analyse how risk aversion affects order quantities under normal, uniform and exponential demand, revealing its impact is strongest when stockout penalties are low but diminishes as they rise. Next, we examine channel coordination, and derive that stockout costs hinder global Pareto optimality (PO) under standard contracts such as buybacks. To overcome this, we propose a demand-dependent side-payment mechanism that restores flexibility. Within the wholesale price framework, we show that PO imposes stricter requirements than the supply chain's objective maximisation criterion. We derive implementation rules for local PO and demonstrate that, when the supplier faces no stockout cost, the wholesale price equals the supplier's unit cost. Finally, in the decentralised setting, we find that incentives for the retailer to misrepresent risk attitudes arise only when stockout penalties are significant.

Fields of Study & Subjects

Supply Chain and Inventory Management Supply Chain Resilience and Risk Management Risk and Portfolio Optimization

Publication details

Journal / source
International Journal of Production Research
Publisher
Informa UK Limited
Pages
1–22
Publication date
10 April 2026
Language
EN