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Financial management in inventory problems: Risk averse vs risk neutral policies

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  • Borgonovo, E.
  • Peccati, L.

Abstract

In this work, we discuss the effect of risk measure selection in the determination of inventory policies. We consider an inventory system characterized by the loss function of Luciano et al. [2003. VaR as a risk measure for multi-period static inventory models. International Journal of Production Economics 81-82, 375-384]. We derive the optimization problems faced by risk neutral, quadratic utility, mean-absolute and CVaR decision makers. Results show that while the global nature of the optimal policy is assured for risk coherent and risk neutral decision makers, the convexity of the quadratic utility problem depends on the stochastic properties of demand. We investigate the economic and stochastic determinants of the different policies. This allows us to establish the conditions under which each type of decision maker is indifferent to imprecision in the distribution families. Finally, we discuss the numerical impact of the choice of the risk measure by means of a multi-item inventory. The introduction of an approach based on Savage Scores allows us to offer a quantitative measurement of the similarity/discrepancy of policies reflecting different risk attitudes.

Suggested Citation

  • Borgonovo, E. & Peccati, L., 2009. "Financial management in inventory problems: Risk averse vs risk neutral policies," International Journal of Production Economics, Elsevier, vol. 118(1), pages 233-242, March.
    • Handle: RePEc:eee:proeco:v:118:y:2009:i:1:p:233-242
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    References listed on IDEAS

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    1. Borgonovo, E. & Peccati, L., 2011. "Finite change comparative statics for risk-coherent inventories," International Journal of Production Economics, Elsevier, vol. 131(1), pages 52-62, May.
    2. Singh, Sachin & McAllister, Charles D. & Rinks, Dan & Jiang, Xiaoyue, 2010. "Implication of risk adjusted discount rates on cycle stock and safety stock in a multi-period inventory model," International Journal of Production Economics, Elsevier, vol. 123(1), pages 187-195, January.
    3. Grubbström, Robert W., 2021. "Production decisions based on absolute vs. relative risk aversion and their extensions," International Journal of Production Economics, Elsevier, vol. 234(C).
    4. Elsayed, Khaled & Wahba, Hayam, 2013. "Reinvestigating the relationship between ownership structure and inventory management: A corporate governanceperspective," International Journal of Production Economics, Elsevier, vol. 143(1), pages 207-218.
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    6. Dai, Yue & Chao, Xiuli, 2016. "Price delegation and salesforce contract design with asymmetric risk aversion coefficient of sales agents," International Journal of Production Economics, Elsevier, vol. 172(C), pages 31-42.
    7. Bo Li & Antonio Arreola‐Risa, 2021. "On minimizing downside risk in make‐to‐stock, risk‐averse firms," Naval Research Logistics (NRL), John Wiley & Sons, vol. 68(2), pages 199-213, March.
    8. Salvatore Greco & Benedetto Matarazzo & Roman Słowiński, 2010. "Dominance-based Rough Set Approach to decision under uncertainty and time preference," Annals of Operations Research, Springer, vol. 176(1), pages 41-75, April.
    9. Grubbström, Robert W., 2010. "The Newsboy problem when customer demand is a compound renewal process," European Journal of Operational Research, Elsevier, vol. 203(1), pages 134-142, May.
    10. Wu, Jun & Wang, Shouyang & Chao, Xiuli & Ng, C.T. & Cheng, T.C.E., 2010. "Impact of risk aversion on optimal decisions in supply contracts," International Journal of Production Economics, Elsevier, vol. 128(2), pages 569-576, December.
    11. Edirisinghe, Chanaka & Atkins, Derek, 2017. "Lower bounding inventory allocations for risk pooling in two-echelon supply chains," International Journal of Production Economics, Elsevier, vol. 187(C), pages 159-167.
    12. Giri, B.C., 2011. "Managing inventory with two suppliers under yield uncertainty and risk aversion," International Journal of Production Economics, Elsevier, vol. 133(1), pages 80-85, September.
    13. Chun-Hung Chiu & Tsan-Ming Choi, 2016. "Supply chain risk analysis with mean-variance models: a technical review," Annals of Operations Research, Springer, vol. 240(2), pages 489-507, May.
    14. Bogataj, D. & Aver, B. & Bogataj, M., 2016. "Supply chain risk at simultaneous robust perturbations," International Journal of Production Economics, Elsevier, vol. 181(PA), pages 68-78.
    15. Wang, Qingwei & Zheng, Meimei & Lee, Ka-Man & Shi, Xiaoqian & Shen, Yichi & Pan, Ershun, 2024. "Optimal product and after-sales service decisions considering risk attitudes under price-dependent uncertain demand," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 182(C).
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    17. Poormoaied, Saeed & Atan, Zümbül, 2020. "A multi-attribute utility theory approach to ordering policy for perishable items," International Journal of Production Economics, Elsevier, vol. 225(C).

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