Risk in inventory models: Review and implementation

In the recent past increasing attention has been shown in incorporating a measure of risk in mathematical inventory models. In particular, three criteria have been closely examined: (1) maximization of a linear function of expected benefits and variance of benefits, (2) maximization of the probability of achieving a certain profit target, and (3) maximization of a market determined risk adjusted measure of benefits. This paper reviews the literature pertaining to the treatment of the newsboy problem when the risk of the inventory investment is explicitly considered. It also presents a comparison of the results obtained under different criteria and addresses the issues involved in implementing these models.