How Probability Weighting Affects Inventory Management with Supply Disruptions
نویسندگان
چکیده
There are many evidences that people tend to overweight low-probability events and underweight highprobability events. This risk attitude is generally expressed as an inverse-S shaped weighting function. This paper considers a risk-averse inventory manager who operates a continuous-review inventory system subject to supply disruption risk. Both Zero-Inventory-Order (ZIO) and Non-ZIO policies are considered. Based on the studies of [1], [2], [3], we provide an Economy Order Quantity under Disruption (EOQD) model with consideration of the inverse-S shaped weighting function. We conduct numerical studies to investigate the impacts of weighting function on optimal decisions and system costs. Our results show that with ZIO policy, ordering more may not be efficient for a risk-averse inventory manager to mitigate supply disruption risk; whereas with Non-ZIO policy, ordering less but more frequently is suggested to be applied.
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