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Article: On the risk-averse procurement strategy under unreliable supply

TitleOn the risk-averse procurement strategy under unreliable supply
Authors
Issue Date2015
Citation
Computers & Industrial Engineering (In press), 2015 How to Cite?
AbstractThis 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
Persistent Identifierhttp://hdl.handle.net/10722/208210

 

DC FieldValueLanguage
dc.contributor.authorShu, Len_US
dc.contributor.authorWu, Fen_US
dc.contributor.authorNi, Jen_US
dc.contributor.authorChu, LKen_US
dc.date.accessioned2015-02-23T08:07:57Z-
dc.date.available2015-02-23T08:07:57Z-
dc.date.issued2015en_US
dc.identifier.citationComputers & Industrial Engineering (In press), 2015en_US
dc.identifier.urihttp://hdl.handle.net/10722/208210-
dc.description.abstractThis 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 selectionen_US
dc.languageengen_US
dc.relation.ispartofComputers & Industrial Engineeringen_US
dc.titleOn the risk-averse procurement strategy under unreliable supplyen_US
dc.typeArticleen_US
dc.identifier.emailNi, J: efdsafgz@hku.hken_US
dc.identifier.emailChu, LK: lkchu@hkucc.hku.hken_US
dc.identifier.authorityChu, LK=rp00113en_US
dc.identifier.doi10.1016/j.cie.2014.12.034en_US
dc.identifier.hkuros242389en_US

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