The Study on the Application of Value at Risk in Inventory Control

This paper explores the possibility to use value at risk (VaR) in the context of inventory management. VaR is being used more and more in financial management as a natural measure of the risk. In the framework of inventory management it can work as well. We first provide a decision analysis justification for the VaR approach based disappointment decision making arguments. Then we provide applications to inventory management based on VaR risk exposure. Both single period and multiperiod inventory models are considered. Although the mathematical problems arising from an application of the VaR approach, tuned to current practice in financial risk management, are difficult to solve analytically, solutions can be found by application of standard computational and simulation techniques. A number of cases are solved and formulated to demonstrate the papers applicability.