Supply Chains Involving a Mean-Variance-Skewness-Kurtosis Newsvendor: Analysis and Coordination

Abstract: The classical newsvendor problem seeks to minimize the expected inventory cost or maximize the expected profit. But optimizing an expected value alone does not fully capture the stochastic nature of the newsvendor problem. Inspired by the higher-moment analyses explored in finance literature, we conduct a mean-variance-skewness-kurtosis (MVSK) analysis for the newsvendor problem. We first derive the analytical expressions for the profit’s mean, variance, skewness, and kurtosis in the standard newsvendor setting, and reveal their structural properties. We then establish various MVSK optimization problems and find the solutions. We analytically show that kurtosis aversion always induces the newsvendor to order less, while skewness seeking can induce the newsvendor to order either more or less depending on the specific structure of the profit’s skewness, which is affected by the symmetric and asymmetric properties of the demand distribution. We further explore the supply chain coordination challenge with the newsvendor possessing the MVSK objective. We find that considering the MVSK preferences of supply chain agents will affect the achievability of coordination and flexibility of the coordinating contract. We also uncover that if we assume an individual MVSK agent to be an MV one, the achievability of coordination by contracts will be very much negatively affected.

Short bio: Tsan-Ming Choi (Jason) is currently Professor of Fashion Business at The Hong Kong Polytechnic University (PolyU). Over the past decade, he has actively participated in a variety of research projects on supply chain management and applied optimization. He has authored/edited 16 research handbooks and published extensively in Web of Science listed citation journals, including Production and Operations Management, Journal of Operations Management, Naval Research Logistics, Transportation Research Part B, Transportation Research Part E, Automatica, Decision Sciences, EJOR, and over 50 papers in various high impact IEEE Transactions (TAC, TASE, TCYB, TEM, TIE, TII, TITS, TSMCS). He is now serving as the Co-Editor-in-Chief of Transportation Research Part E, a senior editor of Production and Operations Management, and Decision Support Systems, an associate editor of IEEE Transactions on Systems, Man, and Cybernetics - Systems, and Information Sciences, and an editorial board member of International Journal of Production Economics, International Journal of Production Research, etc. He received the PolyU-President’s Award of Outstanding Performance in 2008, and the Best Associate Editor Award of IEEE Systems, Man, and Cybernetics Society in two consecutive years (2013 and 2014). He is currently a member of the engineering panel of Research Grants Council (Hong Kong).