Optimal ordering quantities for multi-products with stochastic demand: Return-CVaR model

Abstract

Multi-product-ordering problem with stochastic demand is often optimized by the expected cost reduction or the expected profit improvement, in most of previous works. Moreover, risk preference of decision maker is often ignored. Evidently, this approach is impracticable when the corresponding volatility is larger. Based on the outstanding characteristics of conditional value at risk (CVaR) as a risk measure, the paper proposes an optimal-order model for multi-product with CVaR constraints, also the model is finally formulated as a linear programming problem. The model is simulated for the case of a newsvendor to analyze to what degree it succeeds. The solution, in fact, is bound consistent fully with the decision maker's intuition on return-risk decision making. Finally, results of return-CVaR model and the classical model are compared and shows that return-CVaR model is more flexible than the classical model.