A practical implementation of stochastic programming: an application to the evaluation of option contracts in supply chains

Authors:
Ch. Van Delft;J. -Ph. Vial
Affiliations:
Groupe HEC, Department of Industrial Management and Logistics, Jouy-en-Josas 78351, France;HEC/Department of Management Studies, University of Geneva, 40 Bd du Pont d'Arve, Geneva 4 CH-1211, Switzerland
Venue:
Automatica (Journal of IFAC)
Year:
2004

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Abstract

Stochastic programming is a powerful analytical method in order to solve sequential decision-making problems under uncertainty. We describe an approach to build such stochastic linear programming models. We show that algebraic modeling languages make it possible for non-specialist users to formulate complex problems and have solved them by powerful commercial solvers. We illustrate our point in the case of option contracts in supply chain management and propose a numerical analysis of performance. We propose easy-to-implement discretization procedures of the stochastic process in order to limit the size of the event tree in a multi-period environment.