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Title: Risk aversion in inventory management
Authors: Chen, X.
Sim, M. 
Simchi-Levi, D.
Sun, P.
Keywords: Decision analysis: risk
Inventory/production: policies, uncertainty
Issue Date: 2007
Citation: Chen, X., Sim, M., Simchi-Levi, D., Sun, P. (2007). Risk aversion in inventory management. Operations Research 55 (5) : 828-842. ScholarBank@NUS Repository.
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 multiperiod inventory models as well as multiperiod models that coordinate inventory and pricing strategies. 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. These structural results are extended to models in which the decision maker has access to a (partially) complete financial market and can hedge its operational risk through trading financial securities. Computational results demonstrate that the optimal policy is relatively insensitive to small changes in the decision-maker's level of risk aversion. © 2007 INFORMS.
Source Title: Operations Research
ISSN: 0030364X
DOI: 10.1287/opre.1070.0429
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