Risk averse selective newsvendor problems

Kevin Taaffe, Kiran Chahar and Deepak Tirumalasetty

International Journal of Operational Research, 2008, vol. 3, issue 6, 681-703

Abstract: Consider a firm that offers a product during a single selling season. The firm has the flexibility of choosing which demand sources to serve, but these decisions must be made prior to knowing the actual demand that will materialise in each market. Moreover, we assume that the firm operates on a tight budget and cannot afford to record several successive financial losses spanning consecutive periods. In this case, it is likely that their objective is not only to maximise expected profit, but also to minimise the variance from that goal. We provide insights into the tradeoff between expected profit and demand uncertainty using a mean variance approach. We also present a solution approach, via simulation, to determine a market set (and total order quantity) when the firm's objective is to minimise the probability of receiving a profit below a critical threshold value.

Keywords: demand selection; demand uncertainty; heuristic; mean variance analysis; newsvendor problems; order quantity; risk aversion; simulation. (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (4)

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