Risk Aversion in Inventory Management

By Xin Chen, Melvyn Sim, David Simchi-Levi, Peng Sun. Operational Research, 2007

357 citations recorded by the source corpus.

Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multiperiod inventory models as well as multiperiod models that coordinate inventory and pricing strategies. We show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies. These structural results are extended to models in which the decision maker has access to a (partially) complete financial market and can hedge its operational risk through trading financial securities. Computational results demonstrate that the optimal policy is relatively insensitive to small changes in the decision-maker's level of risk aversion.

Subfields: Finance, Management Information Systems, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/47df3c55fd229f2715e8c5ec9278bc944c47c1be

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Citations in the corpus

On the Value of Mix Flexibility and Dual Sourcing in Unreliable Newsvendor Networks (2005, background): “CVaR Measure Chen et al. (2003) prove that K∗ = F −1X # p−c / p−v is the optimal investment for a perfectly reliable single-product newsvendor problem under a CVaR# objective, where v is the salvage value (assumed to be zero in our work).”
Multi-product newsvendor problem with value-at-risk considerations (2009, methodology): “We illustrate our approach for the cases with independent and bivariate exponential distributions.”
Centralization versus Decentralization: Risk Pooling, Risk Diversification, and Supply Chain Disruptions (2015, background): “Corbett and Rajaram [2006] generalize Eppen’s work to the case of non-normal, dependent demand and show that the magnitude of the risk-pooling effect increases when the demands are less positively dependent.”
Supply Chains Involving a Mean‐Variance‐Skewness‐Kurtosis Newsvendor: Analysis and Coordination (2020, neutral): “Other related studies include Chen et al. (2007), Han et al. (2014), Kazaz and Webster (2015), Kazaz et al. (2016), Hekimo (cid:2) g lu et al. (2016), and Park et al. (2016), among others, which all focus on studying the risk-averse behavior in the newsvendor setting.”
Technical Note - A Risk-Averse Newsvendor Model Under the CVaR Criterion (2009, background): “For a fixed price, the ensuing lemma gives the optimal order quantity, y∗ p , which has been derived in Chen et al. (2007) and is also contained in the online appendix for convenient reference.”
Supply chain risk analysis with mean-variance models: a technical review (2016, background): “…(1979), Eeckhoudt et al. (1995), Keren and Pliskin (2006), Tapiero and Kogan (2009), Wang et al. (2009), Choi and Ruszczynski (2011), Giri (2011) Chen et al. (2007), Borgonovo and Peccati (2009) Value-at-risk Ozler et al. (2009), Chiu and Choi (2010), Chiu et al. (2011b), Jammernegg and…”