Risk Aversion in Inventory Management
Name
IMST027.pdf
Size
15.91 KB
Format
Adobe PDF
Checksum (MD5)
3940dac4b9d4b9c7e82eae27945fbc5d
Author(s)
Chen, Xin
Sim, Melvyn
Simchi-Levi, David
Sun, Peng
Date Issued
January 2005
Series/Report no.
Innovation in Manufacturing Systems and Technology (IMST);
Abstract
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 multi-period inventory models as well as multi-period models that coordinate inventory and pricing strategies. In each case, we characterize the optimal policy for various measures of risk that have been commonly used in the finance literature. In particular, 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. Computational results demonstrate the importance of this approach not only to risk-averse decision makers, but also to risk-neutral decision makers with limited information on the demand distribution.
Subjects
risk aversion
inventory models
risk assessment
risk measurement
pricing strategies
policy decisions
Persistent DSpace Link
