Optimal ordering policy of a risk-averse retailer subject to inventory inaccuracy

Lijing Zhu, Ki Sung Hong, Chul Ung Lee

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Inventory inaccuracy refers to the discrepancy between the actual inventory and the recorded inventory information. Inventory inaccuracy is prevalent in retail stores. It may result in a higher inventory level or poor customer service. Earlier studies of inventory inaccuracy have traditionally assumed risk-neutral retailers whose objective is to maximize expected profits. We investigate a risk-averse retailer within a newsvendor framework. The risk aversion attitude is measured by conditional-value-at-risk (CVaR). We consider inventory inaccuracy stemming both from permanent shrinkage and temporary shrinkage. Two scenarios of reducing inventory shrinkage are presented. In the first scenario, the retailer conducts physical inventory audits to identify the discrepancy. In the second scenario, the retailer deploys an automatic tracking technology, radiofrequency identification (RFID), to reduce inventory shrinkage. With the CVaR criterion, we propose optimal policies for the two scenarios. We show monotonicity between the retailer's ordering policy and his risk aversion degree. A numerical analysis provides managerial insights for risk-averse retailers considering investing in RFID technology.

Original languageEnglish
Article number951017
JournalMathematical Problems in Engineering
Volume2013
DOIs
Publication statusPublished - 2013 Dec 1

Fingerprint

Ordering Policy
Optimal Policy
Shrinkage
Conditional Value at Risk
Scenarios
Risk Aversion
Radio Frequency Identification
Retail stores
Discrepancy
Numerical analysis
Profitability
Audit
Profit
Monotonicity
Numerical Analysis
Customers
Maximise

ASJC Scopus subject areas

  • Mathematics(all)
  • Engineering(all)

Cite this

Optimal ordering policy of a risk-averse retailer subject to inventory inaccuracy. / Zhu, Lijing; Hong, Ki Sung; Lee, Chul Ung.

In: Mathematical Problems in Engineering, Vol. 2013, 951017, 01.12.2013.

Research output: Contribution to journalArticle

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