Two-stage risk-averse stochastic programming approach for multi-item single source ordering problem: CVaR minimisation with transportation cost

Abstract

Integrating inventory and transportation decisions is vital in supply chain management and can enable decision-makers to achieve competitive advantages. This study considers a multi-item replenishment problem (MIRP) with a piece-wise linear transportation cost under demand uncertainty, which usually occurs both in retail and production environment when several items must be ordered from a single supplier. Conventionally, two-stage stochastic programming formulation is risk-neutral, and it lacks robustness in the presence of high data variability. Hence, we introduce the Conditional Value at Risk (CVaR) approach for MIRP. Additionally, we deploy both single and multi-cut L-shaped and the sample average approximation method to circumvent the computational complexity to solve large-scale instances. The data-driven simulation study is used to benchmark the results from deterministic, risk-neutral, and risk-averse stochastic models. The results indicate that under higher data variations, the risk-averse model provides better perspectives for a decision-maker. The results show a 40–50% reduction in lost sales with marginal growth in total cost while considering CVaR instead of a risk-neutral approach.

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