A Risk-Averse Inventory Cost Model Using CVaR
This paper studies the situation where a risk-averse manager, whose company produces goods catering to uncertain demand, has to decide on the quantity to be produced with the objective of minimizing his cost. Demand uncertainty is a major issue faced by many inventory managers, as overstocking or understocking, will result in the company incurring extra unwanted cost. To tackle this problem, an inventory cost model is proposed in this paper. The model is an extension of the newsvendor framework and is formulated as a minimization problem via conditional Value at Risk (CVaR). The solution to the model is presented and evaluated via a case study. Through this model, the optimal inventory level can be determined and this will serve to be useful for the risk-averse inventory manager.
KeywordsNewsvendor Risk-averse Supplier conditional Value at Risk (CVaR) Demand Uncertainty Inventory Cost Model
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