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Production planning problem with pricing under random yield: CVaR criterion

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Abstract

In this paper, we address a basic production planning problem with price dependent demand and stochastic yield of production. We use price and target quantity as decision variables to lower the risk of low yield. The value of risk control becomes more important especially for products with short life cycle. This is because, the profit implications of low yield might be unbearable in the short run. We apply Conditional Value at Risk (CVaR) to model the risk. CVaR measure is a coherent risk measure and thereby having nice conceptual and mathematical underpinnings. It is also widely used in practice. We consider the problem under general demand function and general distribution function of yield and find sufficient conditions under which the problem has a unique local maximum. We also both analytically and numerically analyze the impact of parameter change on the optimal solution. Among our results, we analytically show that with increasing risk aversion, the optimal price increases. This relation is opposite to that of in Newsvendor problem where the uncertainty lies in demand side.

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Authors and Affiliations

  1. Department of Industrial Engineering, Sharif University of Technology, Tehran, Iran

    Saman Eskandarzadeh, Kourosh Eshghi & Mohammad Modarres Yazdi

  2. Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran

    Mohsen Bahramgiri

Authors
  1. Saman Eskandarzadeh
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  2. Kourosh Eshghi
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  3. Mohammad Modarres Yazdi
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  4. Mohsen Bahramgiri
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Correspondence to Saman Eskandarzadeh.

Additional information

SamanEskandarzadehis a Ph.D. candidate at Industrial Engineering Department, Sharif University of Technology, Iran. He received his B.S.in IE from Sharif University of Technology and M.S.in IE from University of Tehran. His research interests are risk optimization, game theory, operations-finance interface. He has published in refereed journals such as European Journal of Operational Research and Journal of Combinatorial Optimization.

KouroshEshghi is a professor at and head of Industrial Engineering Department at Sharif University of Technology, Iran. He received his Ph.D. in the field of operations research from University of Toronto in 1997. His research interests include graph theory, integer programming and combinatorial optimization. He is the author of 2 books and over 60 journal papers.

Mohammad ModarresYazdi is a professor at Department of Industrial Engineering, Sharif University of Technology, Iran. He received his Ph.D. in Systems Engineering and Operations Research from University of California, Los Angles (UCLA) in 1975. His research interests are operations research, revenue management and robust optimization. He has published in European Journal of Operational Research, IEEE Transactions on Power Systems, IEEE Transactions on Reliability, IEEE Transactions on Fuzzy Systems, Naval Research Logistics Quarterly, Fuzzy Sets and Systems, International Journal of Production Research Journal of Operational Research Society, Transportation Research, Journal of Computer and Operations Research, Computers & Industrial Engineering, ScientiaIranica, Iranian Journal of Operations Research.

Mohsen Bahramgiriis an assistant professor at and Vice Chair for Academic Affairs of Graduate School of Management and Economics, Sharif University of Technology, Iran. He received his B.S. in Mathematical Sciences from Sharif University of Technology in 2001 and his Ph.D. in Mathematical Sciencesfrom Massachusetts Institute of Technology in 2007.His research interests are in investment management and corporate finance.

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Eskandarzadeh, S., Eshghi, K., Modarres Yazdi, M. et al. Production planning problem with pricing under random yield: CVaR criterion. J. Syst. Sci. Syst. Eng. 23, 312–328 (2014). https://doi.org/10.1007/s11518-014-5241-1

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  • DOI: https://doi.org/10.1007/s11518-014-5241-1

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