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A risk-averse newsvendor model with limited capacity and outsourcing under the CVaR criterion

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Abstract

For seasonal products, the retailers usually launch various marketing efforts, like advertising and promotion, to promote them in a selling season. While facing large demand from the customers, one should take the capacity constraint and outsourcing into consideration. Considering the shorten life cycles of most products, in this paper we adopt the traditional newsvendor model to investigate the optimal marketing effort along with optimal order quantity. We address the risk aversion issue and characterize the influence of the sellers’ risk propensity with CVaR criterion, and we develop an effective algorithm to obtain the optimal strategy. The impact of sellers’ risk propensity on the performance of the system is illustrated via numerical examples. The innovation of this paper is threefold. First, the optimal joint strategy of the marketing effort and order quantity is investigated and an efficient algorithm to find the optimal strategy is developed. Second, the capacity constraint option and an outsourcing strategy are studied jointly for excess products. Finally, the risk propensity of the seller and its influence are investigated by using the CVaR criterion, through which we obtain some new managerial insights.

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Authors and Affiliations

  1. Department of Mathematics, School of Science, Beijing Jiaotong University, Beijing, 100044, China

    Zhenwei Luo, Jinting Wang & Wanting Chen

Authors
  1. Zhenwei Luo
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  2. Jinting Wang
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  3. Wanting Chen
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Corresponding author

Correspondence to Jinting Wang.

Additional information

Zhenwei Luo received the Bachelor of Science degree from Beijing Jiaotong University, in 2014. His first work appears in Journal of Industrial and Management Optimization. Currently, he is a master student in Operation Research at University of Chinese Academy of Sciences. His research interests are queueing theory and Markov decision processes.

Jinting Wang is a professor in the Department of Mathematics, School of Science at Beijing Jiaotong University in Beijing, China. He received his PhD in Operational Research and Cybernetics from the Institute of Applied Mathematics, Chinese Academy of Sciences (CAS) in 2000. His research interests include issues related to queueing theory, reliability and applied probability. He has published over 40 papers in international journals such as Queueing Systems, European Journal of Operational Research, Journal of Multivariate Analysis, Computers & Industrial Engineering, etc. He is a member of the Operations Research Society of China (ORSC), and now he serves as both Vice-Presidents of the Queueing Chapter and the Reliability Chapter affiliated with ORSC, and Vice-President of Beijing Operations Research Society. He received the Outstanding Research Award for Young Researchers from ORSC in 2004. In 2011, he was honored with the Program for New Century Excellent Talents in University by the Ministry of Education of China.

Wanting Chen received Bachelor of Science degree from Beijing Jiaotong University, in 2014. She is currently a master student in statistics at Columbia University in the City of New York. Her research interests include optimal strategies and big data analysis.

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Luo, Z., Wang, J. & Chen, W. A risk-averse newsvendor model with limited capacity and outsourcing under the CVaR criterion. J. Syst. Sci. Syst. Eng. 24, 49–67 (2015). https://doi.org/10.1007/s11518-015-5263-3

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