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Risk shaping in production planning problem with pricing under random yield

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  • Eskandarzadeh, Saman
  • Eshghi, Kourosh
  • Bahramgiri, Mohsen

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 control the risk of low production yield. The value of risk control becomes more important especially for products with short life cycle where high losses are unbearable in the short run. In this cases, optimization of a solely scalar function of profit is not sufficient to control the risk. We apply Conditional Value at Risk (CVaR) measure to model the risk preferences of the producer. The producer is interested in shaping the risk by bounding from below the means of α-tail distributions of profit for different values of α. The resulting model is nonconvex. We propose an efficient solution algorithm and present a sufficient optimality condition.

Suggested Citation

  • Eskandarzadeh, Saman & Eshghi, Kourosh & Bahramgiri, Mohsen, 2016. "Risk shaping in production planning problem with pricing under random yield," European Journal of Operational Research, Elsevier, vol. 253(1), pages 108-120.
  • Handle: RePEc:eee:ejores:v:253:y:2016:i:1:p:108-120
    DOI: 10.1016/j.ejor.2016.02.032
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    References listed on IDEAS

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    1. repec:eee:proeco:v:191:y:2017:i:c:p:66-73 is not listed on IDEAS
    2. Duijzer, L.E. & van Jaarsveld, W.L. & Dekker, R., 2017. "Literature Review - the vaccine supply chain," Econometric Institute Research Papers EI2017-01, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Duijzer, L.E. & van Jaarsveld, W.L. & Dekker, R., 2017. "The benefits of combining early aspecific vaccination with later specific vaccination," Econometric Institute Research Papers EI2017-03, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    4. repec:eee:ejores:v:268:y:2018:i:1:p:174-192 is not listed on IDEAS
    5. Wu, Xiang & (Yale) Gong, Yeming & Xu, Haoxuan & Chu, Chengbin & Zhang, Jinlong, 2017. "Dynamic lot-sizing models with pricing for new products," European Journal of Operational Research, Elsevier, vol. 260(1), pages 81-92.

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