Managing Finite-Horizon Down-Side Risks of Stochastic and Capacitated Supply Chains

Abstract

We consider minimizing the down-side risk of a supply chain with random demand and capacity. A base-stock inventory to be determined buffers the demand-capacity interaction. The Conditional Value-at-Risk of the finite-horizon holding and back-ordering cost measures down-side risk. We demonstrate the problem is intractable and derive an approximation of the optimal base-stock level. A simulation experiment indicates the approximation yields optimal or near-optimal solutions. We study the manager’s behavior regarding the optimal base-stock level as the supply chain parameters change.