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Retailer-Supplier Flexible Commitments Contracts: A Robust Optimization Approach

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
abental{at}ie.technion.ac.il
golany{at}ie.technion.ac.il
nemirovs{at}ie.technion.ac.il
jean-philippe.vial{at}hec.unige.ch

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.

Key Words: robust optimization; affinely adjustable robust optimization; flexible commitment contracts; supply chain management; min-max criterion
History: Received: February 24, 2003; accepted: April 27, 2005.

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