Value of risk aversion in perishable products supply chain management

Abstract In this paper, we study optimal procurement and inventory decisions for a supply chain with a single perishable product under demand uncertainty. To control risk, on the one hand, we use a risk-averse objective, and on the other hand, we utilize a chance constraint to satisfy demand with a high probability. We formulate the problem as a two-stage stochastic program with a chance constraint and risk-averse objective, where long-term decisions on pre-positioning products are made in the first stage, while recourse decisions on reallocation and emergency procurement are made in the second stage. To allow for different risk preferences, we incorporate conditional value-at-risk into the objective function and study its combination with the expectation or worst-case of the second-stage costs. To solve the resulting models, we develop various variants of the L-shaped method, based on dual and primal decomposition, and by leveraging the connection between the optimization of coherent risk measures and distributionally robust optimization. Through extensive numerical experiments, we demonstrate the value of risk aversion and present a comparative computational study on the performance of different algorithms.