Effect Of Risk Aversion On Order Strategy

In the research of ordering strategy, Newsvendor model is used as a basic model.However, traditional newsvendor model has been unable to meet the need of research.Thus this paper modifies the classical newsvendor model and separately investigatesthree different models: risk neutral newsvendor model with stock loss, risk avoidingnewsvendor model considering punishment for out of stock and risk-averse newsvendormodel considering the supplying reliability.In the risk neutral model, the target function of decision makers is the maximizationof expected profit. But in recent years, a large amount of studies and practices indicatethat when decision makers formulate their ordering strategies, they will take all kinds ofrisk their company might be confronted with into consideration. The reason is thatmerely pursuing maximization of expected profit cannot satisfy decision makers’ need.Therefore, in many situations we need to study risk-averse newsvendor model, whosetarget function is the maximization of the expected utility of profit.In the realistic environment, decision makers usually need to face the demanduncertainty of downstream. Meanwhile, they also have to face the supply uncertainty ofupstream. Demand uncertainty has been deeply investigated in a great deal of studies,while researches about supply reliability are very scarce. Supply uncertainty makes thequantity of goods available for sale differ from the quantity of initial order, which is oneof the elements that decision makers should consider during the ordering.Based on the three newsvendor models, this paper respectively seeks the conditionsthat need to be met when the best order quantity appears. And on the promise ofassuming that demand meets the triangular distribution, I get the expression of the bestorder quantity. This paper also exams the effect of the degree of risk-averse on orderingstrategy. The main research content and results are as following:1) With the construction of probability distribution function of triangular distributionand under the condition that demand meets triangular distribution, I get the best orderquantity of risk neutral and risk-averse decision makers.2) Considering the ordering strategy with supply reliability, I get the best order quantityof risk-averse decision makers when demand and supply reliability factor both meetuniform distribution.3) Based on the above models, I separately discuss the influence of the degree ofrisk-averse on ordering strategy and get the conclusions:1) The best order quantity ofrisk neutral decision makers is larger than that of risk-averse decision makers.2)Asthe degree of risk-averse increases, the best order quantity decrease gradually.