Opportunity Loss Minimization and Newsvendor Behavior
To study the decision bias in newsvendor behavior, this paper introduces an opportunity loss minimization criterion into the newsvendor model with backordering. We apply the Conditional Value-at-Risk (CVaR) measure to hedge against the potential risks from newsvendor’s order decision. We obtain the...
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| Format: | Article |
| Language: | English |
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Wiley
2017-01-01
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| Series: | Discrete Dynamics in Nature and Society |
| Online Access: | http://dx.doi.org/10.1155/2017/3481869 |
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| author | Xinsheng Xu Hong Yan Chi Kin Chan |
| author_facet | Xinsheng Xu Hong Yan Chi Kin Chan |
| author_sort | Xinsheng Xu |
| collection | DOAJ |
| description | To study the decision bias in newsvendor behavior, this paper introduces an opportunity loss minimization criterion into the newsvendor model with backordering. We apply the Conditional Value-at-Risk (CVaR) measure to hedge against the potential risks from newsvendor’s order decision. We obtain the optimal order quantities for a newsvendor to minimize the expected opportunity loss and CVaR of opportunity loss. It is proven that the newsvendor’s optimal order quantity is related to the density function of market demand when the newsvendor exhibits risk-averse preference, which is inconsistent with the results in Schweitzer and Cachon (2000). The numerical example shows that the optimal order quantity that minimizes CVaR of opportunity loss is bigger than expected profit maximization (EPM) order quantity for high-profit products and smaller than EPM order quantity for low-profit products, which is different from the experimental results in Schweitzer and Cachon (2000). A sensitivity analysis of changing the operation parameters of the two optimal order quantities is discussed. Our results confirm that high return implies high risk, while low risk comes with low return. Based on the results, some managerial insights are suggested for the risk management of the newsvendor model with backordering. |
| format | Article |
| id | doaj-art-0ff7b72fe0764b77a756c9d64ad99699 |
| institution | Kabale University |
| issn | 1026-0226 1607-887X |
| language | English |
| publishDate | 2017-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Discrete Dynamics in Nature and Society |
| spelling | doaj-art-0ff7b72fe0764b77a756c9d64ad996992025-02-03T05:50:26ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2017-01-01201710.1155/2017/34818693481869Opportunity Loss Minimization and Newsvendor BehaviorXinsheng Xu0Hong Yan1Chi Kin Chan2Department of Mathematics, Binzhou University, Binzhou, ChinaDepartment of Logistics and Maritime Studies, The Hong Kong Polytechnic University, Kowloon, Hong KongDepartment of Applied Mathematics, The Hong Kong Polytechnic University, Kowloon, Hong KongTo study the decision bias in newsvendor behavior, this paper introduces an opportunity loss minimization criterion into the newsvendor model with backordering. We apply the Conditional Value-at-Risk (CVaR) measure to hedge against the potential risks from newsvendor’s order decision. We obtain the optimal order quantities for a newsvendor to minimize the expected opportunity loss and CVaR of opportunity loss. It is proven that the newsvendor’s optimal order quantity is related to the density function of market demand when the newsvendor exhibits risk-averse preference, which is inconsistent with the results in Schweitzer and Cachon (2000). The numerical example shows that the optimal order quantity that minimizes CVaR of opportunity loss is bigger than expected profit maximization (EPM) order quantity for high-profit products and smaller than EPM order quantity for low-profit products, which is different from the experimental results in Schweitzer and Cachon (2000). A sensitivity analysis of changing the operation parameters of the two optimal order quantities is discussed. Our results confirm that high return implies high risk, while low risk comes with low return. Based on the results, some managerial insights are suggested for the risk management of the newsvendor model with backordering.http://dx.doi.org/10.1155/2017/3481869 |
| spellingShingle | Xinsheng Xu Hong Yan Chi Kin Chan Opportunity Loss Minimization and Newsvendor Behavior Discrete Dynamics in Nature and Society |
| title | Opportunity Loss Minimization and Newsvendor Behavior |
| title_full | Opportunity Loss Minimization and Newsvendor Behavior |
| title_fullStr | Opportunity Loss Minimization and Newsvendor Behavior |
| title_full_unstemmed | Opportunity Loss Minimization and Newsvendor Behavior |
| title_short | Opportunity Loss Minimization and Newsvendor Behavior |
| title_sort | opportunity loss minimization and newsvendor behavior |
| url | http://dx.doi.org/10.1155/2017/3481869 |
| work_keys_str_mv | AT xinshengxu opportunitylossminimizationandnewsvendorbehavior AT hongyan opportunitylossminimizationandnewsvendorbehavior AT chikinchan opportunitylossminimizationandnewsvendorbehavior |