Proceedings of The Fourth International Conference on Informatics & Applications, Takamatsu, Japan, 2015

Order Quantity Derivation

Based on Risk Allocation in Production Planning
Antonio O. N. Rene1 , Nobuyuki Ueno2 , Yuki Taguchi1 and Koji Okuhara1
1
Department of Information and Physical Sciences
Graduate School of Information Science and Technology, Osaka University
1-5 Yamadaoka, Suita, Osaka 565-0871, Japan
E-mail: a-rene@ist.osaka-u.ac.jp
2
Department of Business Information Systems
Faculty of Economics, Hiroshima University of Economics
5-37-1 Gion, Asaminami-Ku, Hiroshima 731-0192, Japan
ABSTRACT
Consistent decisions contribute successfully to high
profits for a company or an institution. In this
paper, we employ linear programming (LP) approach within the cooperative game theory framework to get information regarding order quantity
based on risk allocation and the correspondence between production planning and game theory. In
addition, a numerical illustration precedes a discussion of the strengths and drawbacks of our LP
scheme.

KEYWORDS
Production Planning; Shapley Value; Linear Programming; CVaR; Data.

INTRODUCTION

Managers at every level of decision process are

responsible for strategic and efficient policies
which require consistent models to increase
their profits in a business.
The concept of risk management can be interpreted in different perspectives. Therefore, as
stated by [1], it is important before defining
risk management to understand the concept of
risk. Risk combines both the uncertainty of
outcomes and utility or benefit of outcomes.
Outcomes are summarized by the profit and
loss statement (P &L), and the uncertainty in
profits is described by the distribution or density function which map the many possible realizations for the (P &L), with profits sometimes high and sometimes low [1]. In their
tutorial about value-at-risk (VaR) and condi-

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tional value-at-risk (CVaR), [2] consider risk

management as a procedure for shaping a loss
distribution, while [3] defines risk measure as a
mapping from the set of random variables representing the risk exposure to a real number.
Though several innovations have been proposed for measuring risk, shortfall expectation (SE), VaR, and CVaR (also known as tail
conditional expectation) are on the top of approaches used and accepted by practitioners
[25]. Among them, VaR has several applications in engineering and financial sector. However, this approach is inferior to CVaR when
comes to optimization applications. Both have
a close correspondence when using the same
level of confidence [6].
In this study, we aim to extend a previous work
[7] solving problems related to financial engineering, precisely n periods production planning problem (Fig.1). With this in mind, we
combine risk measure with cooperative game
theory and linear programming (LP). CVaR
is defined as the characteristic function which
analyze the contribution of a player and of a
group of players in a coalition. Due to the correlation between game theory and production
planning, players are interpreted as periods.
The game consists in finding Shapley values
[8, 9], understood as risk allocated to each period. Instead of using the conventional formulation, we use an alternative equivalent Shapley
value which is demonstrated through a numerical example.
The remainder of the paper is organized as follows. Section 2 outlines VaR and CVaR approaches. In Section 3 a proposal for multi-

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period production planning is presented, starting with a summary on coalitional game theory, analyzing the correlation between cooperative games and production planning and as
well, presents an optimization model to calculate the Shapley values. Section 4 provides
a numerical example and Section 5 concludes
the paper with pointers to future work.
2

AN OVERVIEW OF VAR AND CVAR

RISK MEASURES

Risk measure can be defined as a procedure

for shaping a loss distribution, consider for
instance an investors risk profile [2]. VaR,
which is a percentile of a loss distribution
and CVaR are among the few risk measure
approaches most accepted by practitioners.
When dealing with optimization applications
CVaR is superior to VaR [2, 3].
Consider X a random variable with the cumulative distribution function
Fx (z) = P {X z}

(1)

Definition 2.1 The VaR of X with confidence

level (0, 1) is
V aR (X) = min{z : Fx (z) }

(2)

i.e. V aR (X) is a lower -percentile of X and

is proportional to the standard deviation if X is
normally distributed, i.e., X N (, 2 ) then,
F (X) = Fx1 () = + k(),

(3)

where
k() =
and

2erf 1 (2 1)

2
erf(z) =

(4)

The CVaR of X with (0, 1) is the mean of

the generalized -tail distribution:

CV aR (X) =

dFx (z)

(7)

where
{
Fx (z)

0
Fx (z)

1 ,

for z V aR (X)
for z V aR (X)

(8)

CVaR (X) is not equal to an average of outcomes greater than VaR (X).
3 A PROPOSAL FOR MULTI-PERIOD
PRODUCTION PLANNING PROBLEM
3.1 Coalitional Games with Transferable
Utility (TU)
A coalitional game with a finite set of players
is a pair (, v) where = {1, 2, , n} is the
set of players and v : 2N R a real-valued
(also called characteristic function) mapping,
with v() = 0. Any nonempty subset of [8]
(including itself and all the one-element subsets) is called a coalition. The characteristic
function v(H), the worth of coalition H, represents the total amount of transferable utility
that members of H could earn without any help
from the players outside of H, i.e., the maximum sum utility payoffs that the members of
coalition H can guarantee themselves against
the best offensive threat by the complementary
coalition \H.
Definition 3.1 (, v) is said to be superadditive if S, T
v(S T ) v(S) + v(T ), where S T = (9)

x2

dt.

(5)

Definition 2.2 CVaR (X) equals the conditional expectation of X subject to X

VaR (X) for random variables with continuous distribution. Formally,
CV aR (X) = {E[X], s.t. X VaR (X)}
(6)

ISBN: 978-1-941968-16-1 2015 SDIWC

3.1.1 Shapley Value

Motivated by the need of a theory that would
predict a unique expected payoff allocation for
every given coalitional game, the concept of
Shapley value, as one of solution concepts in
cooperative game theory was proposed by [9].
It considers the relative importance of each
player to the game in deciding the payoff to be

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allocated to the players and is formally represented as

i =

H{i}

|H|!(||! |H|! 1)!

||!
{v(H {i}) v(H)} (10)

where, denotes the set of players, H represents the coalition under study and i a player.
Usually, finding the characteristic function
v(H) is a complex work, particularly in
nperson games, since the amount of coalitions players in the game have to build increases exponentially according to the number
of players, i.e., 2n 1. Because of its importance in terms of applications, this function has
been an important topic for research and thus,
a lot of algorithms to support its computation
have been suggested.
In this paper, we defined CVaR as the characteristic function and its computation is described next.
Let D = d1 + d2 + + dn be the cumulative demand and , the degree of significance.
Eq.(11) defines CVaR as follows.

v(H) = CV aRH (1 ) =
di +
+

iH jH

iH

ij

(z1 )
(11)
1 (z1 )

where,
V aRD (1 )

z1 =

12

..
.

12

22

12
2
1 + 12
..
.
12

Game Theory

ij

Here, is the standard normal density, denotes the cumulative function and ij are the
elements of the variance-covariance matrix
shown in (13) .
12
2
1 + 22
..
.

As a technique used for strategic decision

making, game theory can be applied to several problems including production planning.
Comparison between both techniques is presented in Table 1. Our methodology make use
of the elements from the second column which,
are interpreted through their corresponding elements in the third column to perform the computations, for instance players in game theory
correspond to periods in production planning
problem, etc.

(12)

iH jH

2
1
12

= .
..

3.2 Correspondence Between Production

Planning and Game Theory

Table 1. Comparison between production planning

and game theory

di

iH

Figure 1. Production planning for multi-period

22

+ +

n2
(13)

Since CVaR is subadditive [3], - CVaR is a superadditive characteristic function.

ISBN: 978-1-941968-16-1 2015 SDIWC

i
Player
S
Coalition
Characteristic
v
function
i
Shapley value

(1 ): confidence level

The

realization

values

Production
planning
Period
Set of periods
- CVaR(1)
individual
risk

is

the

set

d = [d1 , d2 , . . . , dn ], which is normally

), with d denoting
distributed, i.e., d N (d,
the expected demand. The higher the expected
demand is so will be the production volume,
this can be observed in Fig.1. In the process,

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Now, to compute the Shapley values i we

employ an LP model which is summarized
next, we refer readers to [7] and the references
therein for more details.
Suppose a sample from a data set, where xi
and yi are the values of the referred sample.
One can find the error within the data using the
following inner product defined as:

the inventory Si at period i [4] is defined as

Si = S0 +

xt

t=1

dt

(14)

t=1

As di is a random variable, Si becomes a random variable with an average di and standard

deviation i where di , dj (i = j) are mutually
independent each other and i = di , with
being the order deviation. Once known Shapley values, the derivation of the order quantity
xi for each period i is made as follows:

e = f (A, M, v) = (AT Mv AT MA)

(20)
th
where ( ) denotes the selection of the row
value. Thus, the
sum of all error functions is
given by E = |e | using a multiple linear
regression model which minimizes the sum of
the absolute values of the residuals. Equality
(20) is then transformed into an optimization
problem in program (21).

For i = 1 :
x1 = 1 S0

(15)

For i 2 :
xi = i + i1 + di1

Min

(21)
T
+

T
s.t. A Mv + s s = A MA

(, v) = v()

(16)

That is,

x1 = 1 S0

x2 = 2 + 1 + d1
..
..
..

.
.
.

x = +

n
n
n1 + dn1

0 s+ , 0 s
where the objective function indicates the error to be minimized;
+ +
+ T
sets
s+ =[s+
and
1 , s2 , s3 , . . . , sn ]

T
s =[s1 , s2 , s3 , . . . , sn ] denote the slack
variables added to the model; A is a matrix
obtained according to the formation of the
players coalitions; v is a column matrix whose
elements are the real values v(H) and M =
(diag M,s ) obtained through (22) as follows:

(17)

Its compact form is given by

X = Q + d,

(18)

where,

x1

1 0
1 1
0
1
..
..
.
.
0
0

x2

X = x3 , Q =
.

.
.
xn

1
2

= 3
..
.
n

0 0
0 0
1 0
..
..
.
.
0 0

and

..
.

0
0
0
..
.

...

S0
d1

d = d2 (19)
..
.
dn

If xi 0 then the production volume is desirable, If xi 0, it corresponds to xi = 0 which

means that there is not any order to consider.

ISBN: 978-1-941968-16-1 2015 SDIWC

1
{2 Cs1 }1
(22)
1
In Eq. (22), M,s denotes a set of weights,
as defined previously indicates the set of players and s indicates the number of elements in
the coalition being estimated (s H). To understand the representation of these matrices,
attempt to the following example.
Example 3.1 Let (, v) be a 3-person game
with = {1, 2, 3} the finite set of players. So,
M,s =

1 (, v)
= 2 (, v) ,
3 (, v)

v({1})
v({2})

v({3})

v=
v({1, 2})

v({1, 3})
v({2, 3})

(23)

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Proceedings of The Fourth International Conference on Informatics & Applications, Takamatsu, Japan, 2015

Table 2. The coalitions characteristic function v(H)

with = 0.01

and

1 0 0 1 1 0
AT = 0 1 0 1 0 1
0 0 1 0 1 1

(24)

Computational issues. The process scheme

described in this paper can be applied through
the following stepwise procedure:
Step 1: Define the confidence level 1 , the
expected demand di and initial inventory S0 .
Step 2: To determine the characteristic function v(H): measure each players record. Use
Eq. (11), the obtained solution is assigned as
the characteristic function for the corresponding player or coalition.
Step 3: To determine Shapley values i and
order quantity x : compute the weights M,s
through (22). Using these weights and values
of the characteristic function, Shapley values
and the LPs objective function are calculated
by solving program (21). Once known Shapley
solution, compute Eq. (18).
4

NUMERICAL EXAMPLE

Suppose a planning process for 5 periods, i.e.,

= {1, 2, 3, 4, 5}. Let the initial inventory be
S0 = 10, the expected demand for each period
defined as d = [10, 6, 20, 12, 24], with the variance = 3 and a significance level of = 0.01.
Hence, by (13) the variance-covariance matrix
is given as follows.

9
9

=
9
9
9

9
18
18
18
18

9
18
27
27
27

9
18
27
36
36

9
18

27

36
45

v(H)
0
17.995
17.308
33.848
27.992
41.879
33.879
49.586
43.155
56.616
49.986
43.285
56.519
60.829
73.917
68.967

Coalitions
v{123}
v{124}
v{125}
v{134}
v{135}
v{145}
v{234}
v{235}
v{245}
v{345}
v{1234}
v{1235}
v{1245}
v{1345}
v{2345}
v{12345}

v(H)
65.916
54.519
71.983
75.922
88.853
83.502
76.345
86.640
83.546
101.230
91.793
104.518
98.622
115.933
107.230
131.297

for the main case in each period is given next.

x1 = 17.58 10 = 7.58

x2 = 15.13 17.58 + 20 = 17.55

(26)
x3 = 32.47 15.13 + 24 = 41.34

x4 = 26.38 32.47 + 6 = 0.09

x = 39.73 26.38 + 12 = 25.35

5
In Table 3, we imposed a set of new conditions
to the model to analyze the following three
cases:
Case 1 : 5 31
Case 2: 5 48
Case 3: 1 10

(25)

The coalitions characteristic functions v(H)

are presented in Table 2 using Eq. (11).
As expected, both approaches (Eqs. (10) and
(21)) have the same set of Shapley values for
all periods, i.e. 1 = 17.58, 2 = 15.13,
3 = 32.47, 4 = 26.38 and 5 = 39.73, respectively.
Now, applying Eqs. (16) and (26) and also the
above Shapley solution i s, the order quantities

ISBN: 978-1-941968-16-1 2015 SDIWC

Coalitions
v{}
v{1}
v{2}
v{3}
v{4}
v{5}
v{12}
v{13}
v{14}
v{15}
v{23}
v{24}
v{25}
v{34}
v{35}
v{45}

Table 3. Risk distribution for the first 4 periods obtained

through program (21)
Cases
Main
Case 1
Case 2
Case 3

0.614
2.948
8.877
6.970

1
17.58
14.02
16.97
10

2
15.13
14.51
14.51
14.51

3
32.47
31.98
26.05
31.86

4
26.38
28.71
25.76
28.83

with the Shapley values for the fifth period (5 )

given bellow:
39.73 (main case)
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Proceedings of The Fourth International Conference on Informatics & Applications, Takamatsu, Japan, 2015

42.07 (case 1)

Table 5. The coalitions characteristic function v(H)

with = 0.05

48 (case 2)
46 (case 3)
The slack variables obtained for the optimization problem in all cases are:
+
+
+
+

s+
1 = s2 = s3 = s4 = s5 = 0.614 and s1 =

s3 = 0 (main case).
+
+
+
+
s
1 = s4 = s5 = 2.948, s3 = 0.121 and s1 =

s+
2 = s3 = 0 (case 1).
+

+
+
s+
3 = 5.807, s5 = 8.877 and s1 = s3 = s4
= 0 (case 2).
+
+
+

s
1 = s5 = 6.970, s4 = 3.068 and s3 = s3
= 0 (case 3).
+
s+
1 = s2 = 0 (case 1, 2 and 3).

s
2

s
4

s
5

s+
6

s
6

= 0 for all cases.

Table 4 describes order quantities for each case

using the Shapley solution from Table 3 for the
first four periods. For the sake of space the
results related to the last period are described
next.
Table 4. Production planning for 4 periods

Cases
1
2
3

Production volume x
Period 1 Period 2 Period 3
4.02
10.49
23.47
6.97
7.54
17.54
0
14.51
23.35

Period 4
16.73
19.71
16.97

Period 5: 25.36, 34.24, 29.17 for all cases, respectively.

From the results exposed in Table 4, it is expected higher productivity during periods 3
and 5, mainly the later in all cases considered.
A moderate order can be achieved in period 4.
The first period is the poorest one, beeing nonproductive in the last case, i.e., if we consider
the expected demand to be the same as the initial inventory.
Similar process can be performed by changing
the significance level , the expected demand d
with the same or different pattern for variancecovariance matrix. Table 5 shows the characteristic functions for this case.

ISBN: 978-1-941968-16-1 2015 SDIWC

Coalitions
v{}
v{1}
v{2}
v{3}
v{4}
v{5}
v{12}
v{13}
v{14}
v{15}
v{23}
v{24}
v{25}
v{34}
v{35}
v{45}

v(H)
0
16.188
14.751
30.719
24.377
37.838
29.838
45.158
38.373
51.503
44.565
37.569
50.523
54.312
67.153
61.514

Coalitions v(H)
v{123}
59.153
v{124}
48.523
v{125}
64.752
v{134}
68.255
v{135}
80.874
v{145}
75.024
v{234}
67.677
v{235}
78.357
v{245}
74.154
v{345}
91.005
v{1234}
81.894
v{1235}
94.455
v{1245}
88.082
v{1345}
104.644
v{2345}
97.005
v{12345} 117.893

With the confidence level of 95% the resulted

Shapley values are 15.87, 13.06, 29.65, 23.13
and 36.18 for the five periods, respectively.
This will lead to the following set of order
quantities.
x1 = 5.87
x2 = 7.19
x3 = 22.59
x4 = 13.48
x5 = 25.05
5 CONCLUDING REMARKS
Game theory is a strong tool to solve problems
requiring strategic policies. As one of solution concepts in game theory, Shapley value
can predict efficient decisions. In this work we
combined game theory, risk measure and linear programming techniques to find the Shapley values to acquire information regarding risk
in a multi-period production planning environment. Our model used CVaR as characteristic function and equivalent results were obtained comparing to those from the conventional Shapley value. For production planning
problems such as the present case decision

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makers can evaluate their strategies while performing several cases which imply analyzing
the constraints in the optimization model. Further studies on the consistency of the proposed
model when dealing with uncertainty data is
still a question without answer which, implies
a direction to be considered for extending this
work.
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[4] N. Ueno, K. Okuhara, H. Ishii, H. Shibuki and
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