Article ID Journal Published Year Pages File Type
1133455 Computers & Industrial Engineering 2015 9 Pages PDF
Abstract

•Risk-averse procurement models are proposed under unreliable supply.•Models are found to have unique solutions.•Inventory strategy is effective to control supply risk, but not for a risk-neutral retailer.•Analytical solution is derived for the single-period model.•Order quantity of a more risk-averse retailer is more sensitive to various parameters.

This study investigates an effective procurement/inventory strategy for a risk-averse retailer facing unreliable supply and stochastic demand. By using an increasing and concave utility function to describe risk aversion, we construct a basic newsvendor (single-period) model and its multi-period extension. Both models are found to have unique solutions, as the optimized expected utility is strictly concave in initial inventory level. As a result, there is a unique optimal order quantity for the effective control of supply risk. For the single-period model, the optimal order quantity is derived in its analytical form. We then show by numerical analysis that the value of the optimized expected utility is a function of the initial inventory level when the retailer is risk-averse, becomes less sensitive to initial inventory level when the degree of risk aversion decreases, and is insensitive for the risk-neutral case. This finding suggests that in our setting the inventory holding matters only when the retailer is risk-averse. For the multi-period model, we propose a solution procedure using backward induction since a direct extension of the single-period solution is impossible. We also conduct a sensitivity analysis of demand and supply with the aim of giving some managerial suggestions for demand risk control and supplier selection.

Related Topics
Physical Sciences and Engineering Engineering Industrial and Manufacturing Engineering
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