Abstract: Supply and demand are the two sides of the supply chain and are the main sources of supply uncertainty. How to manage demand uncertainty in the supply chain optimization decision-making process has been widely concerned. However, there are relatively few studies focusing on supply (capacity) uncertainty of supply-side. Our paper is based on two points. On the one hand, capacity uncertainty is quite prevalent for agricultural products, the supply of fresh produce, and assembly systems for large equipment such as airplanes or ships. For example, the production capacity of crops is mainly depending on the difference in temperature and seed quality in the current season. The production capacity of seafood products depends on the timing of fishing vessels choosing the sea and the selected salvage area. In the large-scale assembly system, the original parts and raw material suppliers in the upstream of the supply chain are at risk in terms of on-time delivery and batch quality, resulting in great uncertainty in the assembly system capacity. On the other hand, suppliers with capacity uncertainty are often risk averse. Uncertain production capacity will not only affect the decision-making process and performance of downstream retailers, but also indirectly affect the suppliers themselves through the order quantity of retailers. Therefore, how to manage the risk-averse supplier’s optimal decisions with capacity uncertainty is of great significance. In view of the above problems, our paper focuses a supply chain system consisting of a risk-averse supplier with random capacity and a risk-neutral retailer. By using the classical Value-at-Risk (VaR) approach as a constraint of the supplier’s optimization problem, this paper studies the supplier’s wholesale pricing, the retailer’s selling pricing and ordering quantity decisions in a Stackelberg game. The upper and lower-bounds of wholesale price are obtained, on the basis of this, the optimal wholesale price under random capacity and VaR constraint is analyzed. Additionally, this paper compares the risk-averse results with the results under risk-neutral. In the case of sufficient low (reasonable) profit goal, high risk-averse may increase the wholesale price, low risk-averse does not affect the wholesale price. In the case of very high profit goal, the risk-averse supplier will lower his wholesale price to induce a higher order quantity from the retailer.

Key words: Random Capacity, Risk Aversion, Wholesale price contract, Supply Chain Management