Loss-Averse behavioral hypothesis Manufacturer in engineering supplier development under risk

Supplier development involves efforts undertaken by manufacturing firms to improve their suppliers’ capabilities and performance. These improvement efforts can be targeted at a variety of areas such as quality management, product development, and cost reduction. Since supplier development requires investments on the part of the manufacturer, it is important to optimally allocate investment dollars among multiple suppliers to minimize risk while maintaining an acceptable level of return. This paper presents a optimization model that addresses this issue. Unlike that paper (Talluri et al. 2010), we assume manufacturers are loss averse. Assume that such a scenario: single-manufacturer and multiple suppliers (SMMS). In the SMMS case, we suggest optimal investments in various suppliers by effectively considering risk and return. We use the target shortfall probability approach, it may be easier to motivate and explain to manufacturer.