Supply option purchasing decisions via mismatch cost minimization

Xinsheng Xu, Ping Ji and Shuming Sang

Mathematics and Computers in Simulation (MATCOM), 2023, vol. 210, issue C, 260-280

Abstract: In this paper, the optimal purchasing decisions of the option procurement of newsvendor-type commodities are studied. Based on the mismatch cost minimization criterion, the present study analyzes the option purchasing decisions of a risk-averse newsvendor under the measure of Conditional Value-at-Risk (CVaR). For the purpose of controlling the procurement risk, it is found that a newsvendor’s optimal option purchasing decision under the CVaR measure increases at the quantile level under certain conditions. The result provides alternative explanations for a newsvendor’s over-purchasing behaviors in reality. To mitigate the conservativeness of the CVaR measure, a combined objective defined as the mean-CVaR on mismatch cost is introduced, and the optimal option purchasing decision of a newsvendor minimizing the combined objective is derived. The combined objective can strike a balance between the minimization of CVaR of mismatch cost as well as the minimization of expected mismatch cost. In addition, a sensitivity analysis is performed to exhibit the results and managerial insights are presented to hedge against the potential risks for newsvendors in the option purchasing decision-making.

Keywords: Inventory management; Contracting; Purchasing; Risk hedging; Conditional Value-at-Risk; Risk-averse (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:210:y:2023:i:c:p:260-280

DOI: 10.1016/j.matcom.2023.03.021

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