Loss Aversion Order Strategy in Emergency Procurement during the COVID-19 Pandemic

Abstract

The COVID-19 pandemic has had a serious impact on firms’ sourcing strategies. Since COVID-19 disrupted the supply chain, firms have had to make emergency purchases from other suppliers. In addition, emergency ordering is one of the most effective strategies to achieve sustainable operations because such a strategy can save inventory costs. We aim to address a retailer’s emergency procurement strategies during the COVID-19 pandemic. We use prospect theory and the newsvendor model to uncover the retailer’s inventory decisions. In our study, we find that retailers have the choice to order items before the selling period at the normal purchase price, and, if available, they can order them before the end of the selling period at the urgent purchase price. We perform a comparison of the optimal ordering policy and margins in this case with the conventional and loss aversion models. The influence of emergency procurement on the optimal order policy and margins is investigated as well. This paper contributes in theory that we innovatively capture the uncertainty of emergency sourcing, which is a feature that has never been considered in current research.

Panic buying in the second wave of COVID-19: the moderating effect of past buying experience

“…Research has also shown that past buying experience (PBE) can influence PB behaviour. Zhang et al (2022) found that individuals who had prior experience with PB were more likely to engage in PB during the pandemic. Similarly, in a study on PB behaviour during the H1N1 pandemic, Lau et al (2010) found that individuals who had previous experience with PB were more likely to engage in PB behaviour.…”

“…In the case of PB, the PS and PR act as external stimuli that create an internal state of heightened arousal among individuals, leading to the behavioural response of PB (Zhang et al , 2022). The COVID-19 pandemic has led to numerous stress-related disorders like stress and anxiety (Qiu et al , 2020; Wang et al , 2020a; Xiang et al , 2020), and among these, PR is found to have a significant relationship with people’s behaviour during the pandemic, particularly the PB behaviour of customers (Taghrir et al , 2020).…”

The Impact of Loss Aversion on Peoples Behavior in Different Markets

“…For example, one impact of the pandemic was supply chain shortages. Huang, Li, and Liu studied the emergency procurement strategies of companies under the impact of COVID-19 [14]. The newsvendor model plays an important role in operations management.…”

“…p denotes the selling price. According to their proof, when λ = 1 as well as e = p, the classical newsvendor model becomes a model with emergency procurements and loss aversion [14].…”

“…During a pandemic, the supply chain may be disrupted, thus some of the emergency procurement cannot be completed. Therefore, Huang et al added a stochastic parameter Z to further model the newsvendor in the context of uncertainty in emergency procurement, i.e., under the background of the pandemic [14].…”