Premium
Risk Hedging for Production Planning
Author(s) -
Wang Liao,
Yao David D.
Publication year - 2021
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.13103
Subject(s) - volatility (finance) , production (economics) , time horizon , production planning , computer science , variance (accounting) , analytics , operations research , economics , risk analysis (engineering) , econometrics , business , microeconomics , finance , mathematics , data science , accounting
Traditional production planning is primarily a quantity or capacity decision, which must be made at the beginning of a planning horizon before production starts. Adding to this decision a real‐time control, a risk‐hedging strategy carried out throughout the horizon can better mitigate the risk involved in demand volatility. We demonstrate how this can be done in terms of jointly optimizing the capacity and the hedging decisions, addressing both the mean‐variance and the shortfall objectives. Solution techniques, results, and insights are highlighted. In particular, we illustrate that our approach readily accommodates data analytics and explicitly quantifies the improvement to the efficient frontier contributed by hedging.