Beyond Risk: Ambiguity in Supply Chains

This chapter reviews the notion of ambiguity arising from economics and finance and link it to the supply chain context. One of the popular approaches to account for aversion to ambiguity is the maximin expected utility (MEU) theory developed by Gilboa and Schmeidler. The chapter also reviews implications of this theory in a single period newsvendor setting. The newsvendor problem forms the foundation of many operations management models where a manager needs to decide on the order quantity before knowing the true demand. The chapter revisits a model proposed by Scarf that accounts for imperfect demand distribution information and discusses extensions of this model. It focuses on a supply chain inventory positioning problem that integrates the newsvendor model with a transportation model. Controlled Vocabulary Terms Production and operations management; supply chain