Supply Chain Performance with Target-Oriented Firms 

Is it better to be risk neutral or target oriented? 

Well, the benefits to being risk neutral or target oriented differ for suppliers and retailers. In this case, the researchers found that a supplier or retailer is always hurt by its target-oriented preference but can benefit from its trading partner’s target-oriented preference. For instance, a risk-neutral supplier can sometimes reap profits if the retailer is target-oriented (NT), while a target-oriented supplier always performs better with a target-oriented retailer (TT) than a risk-neutral retailer (TN). 

They also discovered that when both firms are target-oriented (TT), a decentralised supply chain can have a better expected profit than a centralised system. However, a centralised supply chain is preferred when both firms are risk neutral (NN). Above all, whether a firm and supply chain can benefit from having a target-oriented partner depends on how ambitious the retailer or supplier is in setting the target. 

The Dark Side of the Supply Chain 

Despite the many benefits of being target oriented, this approach can put a firm in a less favourable position than their trading partners or leave them open to exploitation by their trading partners. For instance, a target-oriented or risk-neutral supplier will set a higher wholesale price for target-oriented retailers because it knows its retailers will order more quantities to reach their target profit. 

Hence, the retailer or supplier should adopt the target-oriented decision criterion cautiously and consider strategies that might prevent them from being manipulated by their suppliers or retailers. One way is for the retailers to reveal an outside option or alternative supplier. 

Professor Qinshen commented, “By revealing their outside option, it signals to the suppliers that the retailers have several other suppliers or sources. Hence, the suppliers cannot manipulate the retailers by setting a higher wholesale price as the retailers can always switch to their alternative or backup suppliers.”. 

Retailer type misidentification 

Another strategy retailers can consider is to hide their target-oriented preference from their suppliers. This results in retailer type misidentification as the supplier believes their target-oriented retailer is risk neutral and vice versa. 

First, let us consider scenarios where the supplier is risk neutral. If the risk-neutral supplier mistakes their retailer as being risk neutral, the researchers found that the supplier will set a lower wholesale price when the retailer’s order quantity is higher. This suggests that the retailer will benefit from this misidentification, whereas the supplier will be hurt by the retailer. When the risk-neutral supplier wrongly identifies their retailer as target-oriented, the supplier will act differently to how they would with a risk-neutral retailer and set a different wholesale price. However, the retailer will respond in a risk-neutral way; hence, it will not benefit either party or the supply chain. 

Next, the researchers compared scenarios where the supplier is target oriented. When a target-oriented supplier mistakenly treats the retailer as risk neutral, the supplier sets a lower wholesale price, resulting in a larger order. Interestingly, suppliers and retailers can sometimes be better off when this happens. Conversely, when a target-oriented supplier mistakes the retailer as being target oriented, the wholesale price is higher, and the order quantity is lower. Notably, a target-oriented supplier can sometimes benefit from this misidentification. 

“While it is common for businesses to aim for specific goals or targets, our research cautions decision-makers about the potential risks of this approach, as it can be exploited by their trading partners. However, from the perspective of the whole supply chain, a company’s focus on targets can improve efficiency”, said Professor Qinshen on the implications behind his research.