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

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.