ABSTRACT
Production and operations management research has provided a number of classic models such as the EOQ formula (Harris 1913), the news vendor model (as in Arrow et al. 1951), the HMMS model (Holt et al. 1960), the Wagner-Whitin model (Wagner and Whitin 1958), Clark and Scarf’s (1960) echelon inventory model, and more recent examples such as Lariviere and Porteus’s (2001) selling-to-a-news vendor and the various channel coordination models described in Cachon (2003), among many others. Common themes in these models are the assumptions of infinite liquidity (i.e., sufficient cash for any expenditure) and the absence of risk considerations (at least as related to operational decisions) in the evaluation of cash flows. Both of these assumptions conflict with practical observations of finite liquidity and premiums applied to cash flows on the basis of risk contribution (that cannot be eliminated by diversification).
