Optimal lead time policy for short life cycle products under Conditional Value-at-Risk criterion

• Optimal ordering time, order quantity, and wholesale price decisions under CVaR criterion are investigated.
• Lead time can be reduced by additional crashing cost to enhance the forecast accuracy of market demand.
• Revenue sharing contract is proposed to achieve supply chain coordination.
• The effects of decision maker’s risk aversion and forecast error on optimal decisions and utilities are examined.
• The managerial implications under time-based competition environment are provided.

The lead time reduction problem in a supply chain with a risk-averse retailer and a risk-neutral manufacturer for short life cycle products is studied in this paper. Lead time can be reduced by additional crashing cost to enhance forecast accuracy of uncertain demand. Under Conditional Value-at-Risk (CVaR) criterion, the effects of decision maker’s risk aversion and additional crashing cost for lead time reduction on optimal decisions are analyzed. Moreover, a revenue sharing contract is proposed to achieve supply chain coordination. The results suggest that when the retailer is more risk-averse and when forecast error is larger, the retailer tends to select a shorter lead time despite the higher wholesale price charged by the manufacturer. However, if the retailer is mildly risk-averse and the forecast error is small, he might not select to shorten the lead time because of associated additional crashing cost. Thus, the retailer should carefully balance the benefit against the cost of lead time reduction. In addition, we find lead time reduction is conductive to improving supply chain efficiency compared to the case without lead time reduction. Revenue sharing contract can achieve supply chain coordination and Pareto improvement for both supply chain agents. The improved utilities increase as the decision maker is more risk-averse and the forecast error is higher.