Retailer-Supplier Flexible Commitments Contracts: A Robust Optimization Approach

  • Authors:

  • Aharon Ben-Tal;Boaz Golany;Arkadi Nemirovski;Jean-Philippe Vial

  • Affiliations:

  • Faculty of Industrial Engineering and Management, Technion-Israel Institute of Technology, Haifa 32000, Israel;Faculty of Industrial Engineering and Management, Technion-Israel Institute of Technology, Haifa 32000, Israel;Faculty of Industrial Engineering and Management, Technion-Israel Institute of Technology, Haifa 32000, Israel;Department of Management Studies, University of Geneva, 40 Bd du Pont d'Arve, CH-1211 Geneva 4, Switzerland

  • Venue:
  • Manufacturing & Service Operations Management
  • Year:
  • 2005

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Abstract

We propose the use of robust optimization (RO) as a powerful methodology for multiperiod stochastic operations management problems. In particular, we study a two-echelon multiperiod supply chain problem, known as the retailer-supplier flexible commitment (RSFC) problem with uncertain demand that is only known to reside in some uncertainty set. We adopt a min-max criterion, whereby the cost function is minimized against the worst case demand occurrence. To solve the min-max RSFC problem we employ a recent extension of the RO method adapted to dynamic decision problems and known as the affinely adjustable robust counterpart (AARC) methodology. The AARC solution is tested by a large simulation study and found to provide excellent results.