Retailer-Supplier Flexible Commitments Contracts: A Robust Optimization Approach

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

doi:10.1287/msom.1050.0081

Retailer-Supplier Flexible Commitments Contracts: A Robust Optimization Approach

Aharon Ben-Tal¹; Boaz Golany¹; Arkadi Nemirovski¹; Jean-Philippe Vial²

¹ Faculty of Industrial Engineering and Management, Technion—Israel Institute of Technology, Haifa 32000, Israel · ² Department of Management Studies, University of Geneva, 40 Bd du Pont d’Arve, CH-1211 Geneva 4, Switzerland

Manufacturing and Service Operations Management 2005

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.

DOI: 10.1287/msom.1050.0081
Volume: 7 (3)
Pages: 248-271
Language: en
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