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- Publisher Website: 10.1016/j.cie.2014.12.034
- Scopus: eid_2-s2.0-84939966542
- WOS: WOS:000355040100012
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Article: On the risk-averse procurement strategy under unreliable supply
Title | On the risk-averse procurement strategy under unreliable supply |
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Authors | |
Keywords | Expected utility Inventory strategy Stochastic demand Supply risk |
Issue Date | 2015 |
Citation | Computers & Industrial Engineering, 2015, v. 84, p. 113-121 How to Cite? |
Abstract | 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 |
Persistent Identifier | http://hdl.handle.net/10722/208210 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Shu, L | en_US |
dc.contributor.author | Wu, F | en_US |
dc.contributor.author | Ni, J | en_US |
dc.contributor.author | Chu, LK | en_US |
dc.date.accessioned | 2015-02-23T08:07:57Z | - |
dc.date.available | 2015-02-23T08:07:57Z | - |
dc.date.issued | 2015 | en_US |
dc.identifier.citation | Computers & Industrial Engineering, 2015, v. 84, p. 113-121 | en_US |
dc.identifier.uri | http://hdl.handle.net/10722/208210 | - |
dc.description.abstract | 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 | en_US |
dc.language | eng | en_US |
dc.relation.ispartof | Computers & Industrial Engineering | en_US |
dc.subject | Expected utility | - |
dc.subject | Inventory strategy | - |
dc.subject | Stochastic demand | - |
dc.subject | Supply risk | - |
dc.title | On the risk-averse procurement strategy under unreliable supply | en_US |
dc.type | Article | en_US |
dc.identifier.email | Ni, J: efdsafgz@hku.hk | en_US |
dc.identifier.email | Chu, LK: lkchu@hkucc.hku.hk | en_US |
dc.identifier.authority | Chu, LK=rp00113 | en_US |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1016/j.cie.2014.12.034 | en_US |
dc.identifier.scopus | eid_2-s2.0-84939966542 | - |
dc.identifier.hkuros | 242389 | en_US |
dc.identifier.volume | 84 | - |
dc.identifier.spage | 113 | - |
dc.identifier.epage | 121 | - |
dc.identifier.isi | WOS:000355040100012 | - |