DATA-DRIVEN TWO-STAGE STOCHASTIC PROGRAMMING FOR SUPPLY CHAIN NETWORK DESIGN UNDER DEMAND AND LEAD-TIME UNCERTAINTY
Keywords:
two-stage stochastic programming, supply chain network design, sample average approximation, Bender’s decomposition, data-driven optimization, demand uncertainty, disruption risk management, value of stochastic solution
Abstract
Supply chain network design decisions made under deterministic assumptions frequently prove inadequate when deployed in volatile operational environments characterized by demand fluctuations and supplier performance variability. This work develops and computationally validates a two-stage stochastic programming model that explicitly incorporates both demand uncertainty and supplier disruption severity into strategic facility location and supplier selection decisions. Rather than relying on synthetic data or assumed probability distributions (a common limitation in existing literature), we parameterize our stochastic model using empirical marginal distributions derived from a publicly available transactional dataset comprising supply chain records across five major Indian metropolitan regions.
The uncertain parameters are represented through a Sample Average Approximation (SAA) scheme with rigorous statistical validation, generating equiprobable scenarios via independent truncated normal distributions. Strategic decisions regarding supplier selection and warehouse activation are optimized in the first stage, while transportation flows and unmet demand penalties are determined recursively in the second stage upon scenario realization. To ensure computational tractability for realistic problem instances, we implement an exact multi-cut Benders decomposition algorithm that exploits the problem’s relatively complete recourse structure.
Our computational investigation (spanning nine systematically varied instances and validated through out-of-sample testing and bootstrap confidence intervals) demonstrates that the stochastic optimization framework yields expected cost reductions of approximately 5% to 9% relative to deterministic benchmarks when substituting random parameters with point estimates. Furthermore, we establish that the Value of Stochastic Solution (VSS) exhibits a nonlinear convex relationship with demand variability, increasing sharply at higher coefficient of variation levels. The Expected Value of Perfect Information (EVPI) ranges between 6.3% and 8.6% across tested instances, quantifying the economic justification for investments in demand forecasting infrastructure. Comparative analysis against robust optimization baselines confirms that data-informed stochastic programming outperforms distribution-free approaches when empirical information is available. These findings underscore the practical necessity of stochastic optimization methodologies for supply chain planning in environments exhibiting significant demand volatility.
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References
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[42] Long, D., & Fernandes, N. (2021). Data-driven supply chain optimization: A tutorial. Tutorials in Operations Research, 99–123.
[43] Rockafellar, R. T., & Uryasev, S. (2000). Optimization of conditional value-at-risk. Journal of Risk, 2(3), 21–41.
[44] Ahmed, S. (2006). Mean-risk objectives in stochastic programming. Mathematical Programming, 107(1-2), 1–26.
[45] Mak, H.-K., Morton, D. P., & Wood, R. K. (1999). Monte Carlo bounding techniques for solution of multistage stochastic linear programs. Operations Research Letters, 24(1-2), 47–54.
[46] Shapiro, A., & Homem-de-Mello, T. (2000). On rate of convergence of Monte Carlo approximations of stochastic programs. SIAM Journal on Optimization, 11(1), 1–19.
[47] Niederreiter, H. (1992). Random Number Generation and Quasi-Monte Carlo Methods. SIAM.
[48] Høyland, K., Kaut, M., & Wallace, S. W. (2003). A heuristic for moment-matching scenario generation. Computational Optimization and Applications, 24(2-3), 169–185.
[49] Pflug, G. C. (2001). Scenario tree generation for multiperiod financial optimization by optimal discretization. Mathematical Programming, 89(2), 251–271.
[50] Gupta, A., & Grossmann, I. E. (2011). A new scheme for scenario reduction in multistage stochastic programming with applications to stochastic optimization. Computers & Chemical Engineering, 35(9), 1827–1842.
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[53] Bayraksan, G., & Pierre-Louis, P. (2012). Fixed-ranking generalized likelihood uncertainty estimators. INFORMS Journal on Computing, 24(3), 562–576.
[54] Benders, J. F. (1962). Partitioning procedures for solving mixed-variables programming problems. Numerische Mathematik, 4(1), 238–252.
[55] Van Slyke, R. M., & Wets, R. (1969). L-shaped linear programs with applications to optimal control and stochastic programming. SIAM Journal on Applied Mathematics, 17(4), 638– 663.
[56] Birge, J. R., & Louveaux, F. V. (1988). A multicut algorithm for two-stage stochastic linear programs. European Journal of Operational Research, 34(3), 384–392.
[57] You, F., & Grossmann, I. E. (2013). Multicut Benders decomposition algorithm for process supply chain planning under uncertainty. AIChE Journal, 59(3), 781–860.
[58] Magnanti, T. L., & Wong, R. T. (1981). Accelerating Benders decomposition: Algorithmic enhancements, model selection criteria, and subgradient strategies. Mathematical Programming, 21(1), 121–144.
[59] Papadakos, N. (2008). Practical enhancements to the Magnanti-Wong method. Operations Research Letters, 36(4), 444–449.
[60] Crunican, E., & Smith, J. C. (2022). Inexact Benders decomposition for stochastic network design. Operations Research Letters, 50(4), 432–438.
[61] Thi, T. L., Tan, Y., & Dawande, M. (2020). Parallel Benders decomposition for stochastic programming. INFORMS Journal on Computing, 32(3), 737–751.
[62] You, F., & Grossmann, I. E. (2013). Multicut Benders decomposition algorithm for process supply chain planning under uncertainty. AIChE Journal, 59(3), 781–860.
[63] Bertsimas, D., Brown, D. B., & Caramanis, C. (2011). Theory and applications of robust optimization. SIAM Review, 53(3), 464–501.
[64] Bertsimas, D., Koryakin, D., & Sim, M. (2019). Data-driven robust optimization in the presence of covariate shifts. Mathematical Programming, 178(1-2), 235–285.
[65] Delage, E., & Ye, Y. (2010). Distributionally robust optimization under moment uncertainty with application to data-driven problems. Operations Research, 58(3), 595–618.
[66] Mohajerin Esfahani, P., & Kuhn, D. (2018). Data-driven distributionally robust optimization using the Wasserstein metric: Performance guarantees and tractable reformulations. Mathematical Programming, 171(1-2), 115–166.
[67] Bertsimas, D., & Sim, M. (2004). The price of robustness. Operations Research, 52(1), 35–53.
[68] Elmachtoub, A. N., & Grigoriev, P. (2022). Smart “predict, then optimize”. Management Science, 68(9), 6508–6525.
[69] Motefaker, L. (2023). Supply Chain Dataset. Kaggle. https://www.kaggle.com/ datasets/amirnotefaker/supply-chain-dataset.
[70] Higham, N. J. (2002). Computing the nearest correlation matrix (a problem from finance). IMA Journal of Numerical Analysis, 22(3), 329–343.
[71] Czado, C. (2019). Analyzing Dependent Data with Vine Copulas. Lecture Notes in Statistics, Vol. 222. Springer.
[72] Goh, J., Sim, M., & Zhang, Y. (2022). Data-driven stochastic programming: From data to decisions. In Tutorials in Operations Research, pp. 115–138. INFORMS.
[73] Ruszczynski, A. (2006). Interior point methods in stochastic programming. In Advanced Topics in Linear Programming, pp. 27–46. Springer.
[74] Kuhn, D., Strauss, A. K., & Wolle, D. (2022). The wait-and-see solution is not always valid for evaluating stochastic programs. Operations Research Letters, 50(5), 732–737.
[75] Bertsimas, D., & Sim, M. (2004). The price of robustness. Operations Research, 52(1), 35–53.
[76] Rockafellar, R. T., & Uryasev, S. (2000). Optimization of conditional value-at-risk. Journal of Risk, 2(3), 21–41.
[77] Ban, G.-Y., & Rudin, C. (2019). The big data newsvendor: Practical insights from machine learning. Operations Research, 67(1), 90–108.
[78] Joe, H. (2014). Dependence Modeling with Copulas. Chapman & Hall/CRC.
[79] Dumouchelle, J., Patel, R., Khalil, E. B., & Bodur, M. (2022). Neur2SP: Neural two-stage stochastic programming. arXiv preprint arXiv:2205.12006.
[80] Kotary, J., Fioretto, F., Van Hentenryck, P., & Wilder, B. (2021). End-to-end constrained optimization learning: A survey. arXiv preprint arXiv:2103.16378.
[2] Snyder, L. V. (2006). Facility location under uncertainty: A review. Operations Research Letters, 34(7), 537–548.
[3] Tomlin, B. (2006). On the value of mitigation and contingency strategies for managing supply chain disruption risks. Management Science, 52(5), 739–757.
[4] Tang, C. S. (2006). Perspectives in supply chain risk management. International Journal of Production Economics, 103(2), 451–488.
[5] Sheffi, Y., & Rice Jr, J. B. (2005). A supply chain view of the resilient enterprise. MIT Sloan Management Review, 47(1), 41–48.
[6] Ivanov, D. (2021). Supply chain viability and the COVID-19 pandemic: A literature review and conceptualization. International Journal of Production Research, 59(12), 3535–3552.
[7] Birge, J. R., & Louveaux, F. (2011). Introduction to Stochastic Programming, 2nd ed. Springer.
[8] Dantzig, G. B. (1955). Linear programming under uncertainty. Management Science, 1(34), 197–206.
[9] Beale, E. M. L. (1955). On minimizing a convex function subject to linear inequalities. Journal of the Royal Statistical Society, Series B, 17(2), 173–184.
[10] Wets, R. J.-B. (1983). Solving stochastic programs with simple recourses. Stochastics, 10(34), 219–242.
[11] Kall, P., & Mayer, J. (2011). Stochastic Linear Programming: Models, Theory, and Computation, 2nd ed. Springer.
[12] Kleywegt, A. J., Shapiro, A., & Homem-de-Mello, T. (2002). The sample average approximation method for stochastic discrete optimization. SIAM Journal on Optimization, 12(2), 479–502.
[13] Kleywegt, A. J., Shapiro, A., & Homem-de-Mello, T. (2002). The sample average approximation method for stochastic discrete optimization. SIAM Journal on Optimization, 12(2), 479–502.
[14] Homem-de-Mello, T., & Bayraksan, G. (2014). Monte Carlo sampling-based methods for stochastic optimization. Annals of Operations Research, 217(1), 59–85.
[15] Govindan, K., Fattahi, M., & Keyvashokooh, E. (2017). Supply chain network design under uncertainty: A comprehensive review and future research directions. European Journal of Operational Research, 263(1), 108–141.
[16] Govindan, K., Fattahi, M., & Keyvashokooh, E. (2017). Supply chain network design under uncertainty: A comprehensive review and future research directions. European Journal of Operational Research, 263(1), 108–141.
[17] Gutjahr, W. J., Pahl, J., Reiss, S., Rezer, S., & Schuster, R.-F. (2022). A data-driven approach for multi-objective optimization problems under uncertainty. Tutorials in Operations Research, 115–138.
[18] Long, D., & Fernandes, N. (2021). Data-driven supply chain optimization: A tutorial. Tutorials in Operations Research, 99–123.
[19] Bertsimas, D., & Kallus, N. (2020). From predictive to prescriptive analytics. Management Science, 66(8), 2045–2066.
[20] Ban, G.-Y., & Rudin, C. (2019). The big data newsvendor: Practical insights from machine learning. Operations Research, 67(1), 90–108.
[21] Aas, K., Czado, C., Frigessi, A., & Bakken, H. (2009). Pair-copula constructions of multiple dependence. Biometrika, 96(4), 982–1000.
[22] Shapiro, A. (2003). Monte Carlo sampling methods. In Handbooks in Operations Research and Management Science, Vol. 10, pp. 353–425. Elsevier.
[23] Melo, M. T., Nickel, S., & Saldanha-da-Gama, F. (2009). Facility location and supply chain management: A review. European Journal of Operational Research, 196(2), 401–412.
[24] Snyder, L. V. (2006). Facility location under uncertainty: A review. Operations Research Letters, 34(7), 537–548.
[25] Santoso, T., Ahmed, S., Goetschalckx, M., & Shapiro, A. (2005). A stochastic programming approach for supply chain network design under uncertainty. European Journal of Operational Research, 167(1), 96–115.
[26] Snyder, L. V., & Daskin, M. S. (2006). Models for reliability systems: The expected failure cost. Transportation Science, 39(3), 396–414.
[27] Peng, P., Snyder, L. V., Lim, A., & Liu, Z. (2011). Reliable logistics network design with facility disruptions. Transportation Research Part E, 47(6), 1024–1038.
[28] Schmitt, A. J., & Singh, M. (2012). A quantitative analysis of disruption risk in a multiechelon supply chain. International Journal of Production Economics, 139(1), 23–36.
[29] Azaron, A., Brown, K. N., Tarim, S. A., & Modarres, M. (2008). A multi-objective stochastic programming approach for supply chain design considering risk. International Journal of Production Economics, 116(1), 129–138.
[30] Snyder, L. V., Atan, Z., Peng, P., Rong, Y., Schmitt, A. J., & Sinsoysal, B. (2016). OR/MS models of supply chain risks: A review. OR Spectrum, 38(4), 695–713.
[31] Ivanov, D. (2021). Supply chain viability and the COVID-19 pandemic: A literature review and conceptualization. International Journal of Production Research, 59(12), 3535–3552.
[32] Garcia-Herreros, P., Wassan, J., & Salhi, S. (2016). VNS for a multi-period facility location problem with modular capacities and transportation decisions. Computers & Operations Research, 69, 50–61.
[33] Shapiro, A., Dentcheva, D., & Ruszczyn´ski, A. (2009). Lectures on Stochastic Programming. SIAM.
[34] Birge, J. R., & Louveaux, F. (2011). Introduction to Stochastic Programming, 2nd ed. Springer.
[35] Santoso, T., Ahmed, S., Goetschalckx, M., & Shapiro, A. (2005). A stochastic programming approach for supply chain network design under uncertainty. European Journal of Operational Research, 167(1), 96–115.
[36] Choi, T.-M. (Ed.). (2021). Handbook of Newsvendor Problems: Models, Extensions and Applications. Springer.
[37] Miranda, P. A., & Garrido, R. A. (2004). Incorporating logistics decisions in strategic supply chain network design. Journal of the Chilean Institute of Engineers, 17, 10–16.
[38] Aissaoui, N., Haouari, M., & Hassini, E. (2007). Supplier selection and order lot sizing modeling: A review. Computers & Industrial Engineering, 53(1), 1–15.
[39] Kouvelis, P., & Yu, G. (2013). Robust Discrete Optimization and Its Applications. Springer.
[40] Schu¨tz, P., Tomasgard, A., & Ahmed, S. (2009). Supply chain design under uncertainty using SAA and dual decomposition. European Journal of Operational Research, 199(2), 409–419.
[41] Wang, W., Huang, L., Liang, Z., & Zhang, Z. (2020). A stochastic programming model for reliable supply chain design. Computers & Industrial Engineering, 148, 106691.
[42] Long, D., & Fernandes, N. (2021). Data-driven supply chain optimization: A tutorial. Tutorials in Operations Research, 99–123.
[43] Rockafellar, R. T., & Uryasev, S. (2000). Optimization of conditional value-at-risk. Journal of Risk, 2(3), 21–41.
[44] Ahmed, S. (2006). Mean-risk objectives in stochastic programming. Mathematical Programming, 107(1-2), 1–26.
[45] Mak, H.-K., Morton, D. P., & Wood, R. K. (1999). Monte Carlo bounding techniques for solution of multistage stochastic linear programs. Operations Research Letters, 24(1-2), 47–54.
[46] Shapiro, A., & Homem-de-Mello, T. (2000). On rate of convergence of Monte Carlo approximations of stochastic programs. SIAM Journal on Optimization, 11(1), 1–19.
[47] Niederreiter, H. (1992). Random Number Generation and Quasi-Monte Carlo Methods. SIAM.
[48] Høyland, K., Kaut, M., & Wallace, S. W. (2003). A heuristic for moment-matching scenario generation. Computational Optimization and Applications, 24(2-3), 169–185.
[49] Pflug, G. C. (2001). Scenario tree generation for multiperiod financial optimization by optimal discretization. Mathematical Programming, 89(2), 251–271.
[50] Gupta, A., & Grossmann, I. E. (2011). A new scheme for scenario reduction in multistage stochastic programming with applications to stochastic optimization. Computers & Chemical Engineering, 35(9), 1827–1842.
[51] Gupta, A., & Grossmann, I. E. (2011). A new scheme for scenario reduction in multistage stochastic programming with applications to stochastic optimization. Computers & Chemical Engineering, 35(9), 1827–1842.
[52] Razavi, S., Sheikholeslami, R., Haghnegahdar, A., & Nazemi, A. (2022). Review of scenario generation methods for stochastic programming. Environmental Modelling & Software, 156, 105461.
[53] Bayraksan, G., & Pierre-Louis, P. (2012). Fixed-ranking generalized likelihood uncertainty estimators. INFORMS Journal on Computing, 24(3), 562–576.
[54] Benders, J. F. (1962). Partitioning procedures for solving mixed-variables programming problems. Numerische Mathematik, 4(1), 238–252.
[55] Van Slyke, R. M., & Wets, R. (1969). L-shaped linear programs with applications to optimal control and stochastic programming. SIAM Journal on Applied Mathematics, 17(4), 638– 663.
[56] Birge, J. R., & Louveaux, F. V. (1988). A multicut algorithm for two-stage stochastic linear programs. European Journal of Operational Research, 34(3), 384–392.
[57] You, F., & Grossmann, I. E. (2013). Multicut Benders decomposition algorithm for process supply chain planning under uncertainty. AIChE Journal, 59(3), 781–860.
[58] Magnanti, T. L., & Wong, R. T. (1981). Accelerating Benders decomposition: Algorithmic enhancements, model selection criteria, and subgradient strategies. Mathematical Programming, 21(1), 121–144.
[59] Papadakos, N. (2008). Practical enhancements to the Magnanti-Wong method. Operations Research Letters, 36(4), 444–449.
[60] Crunican, E., & Smith, J. C. (2022). Inexact Benders decomposition for stochastic network design. Operations Research Letters, 50(4), 432–438.
[61] Thi, T. L., Tan, Y., & Dawande, M. (2020). Parallel Benders decomposition for stochastic programming. INFORMS Journal on Computing, 32(3), 737–751.
[62] You, F., & Grossmann, I. E. (2013). Multicut Benders decomposition algorithm for process supply chain planning under uncertainty. AIChE Journal, 59(3), 781–860.
[63] Bertsimas, D., Brown, D. B., & Caramanis, C. (2011). Theory and applications of robust optimization. SIAM Review, 53(3), 464–501.
[64] Bertsimas, D., Koryakin, D., & Sim, M. (2019). Data-driven robust optimization in the presence of covariate shifts. Mathematical Programming, 178(1-2), 235–285.
[65] Delage, E., & Ye, Y. (2010). Distributionally robust optimization under moment uncertainty with application to data-driven problems. Operations Research, 58(3), 595–618.
[66] Mohajerin Esfahani, P., & Kuhn, D. (2018). Data-driven distributionally robust optimization using the Wasserstein metric: Performance guarantees and tractable reformulations. Mathematical Programming, 171(1-2), 115–166.
[67] Bertsimas, D., & Sim, M. (2004). The price of robustness. Operations Research, 52(1), 35–53.
[68] Elmachtoub, A. N., & Grigoriev, P. (2022). Smart “predict, then optimize”. Management Science, 68(9), 6508–6525.
[69] Motefaker, L. (2023). Supply Chain Dataset. Kaggle. https://www.kaggle.com/ datasets/amirnotefaker/supply-chain-dataset.
[70] Higham, N. J. (2002). Computing the nearest correlation matrix (a problem from finance). IMA Journal of Numerical Analysis, 22(3), 329–343.
[71] Czado, C. (2019). Analyzing Dependent Data with Vine Copulas. Lecture Notes in Statistics, Vol. 222. Springer.
[72] Goh, J., Sim, M., & Zhang, Y. (2022). Data-driven stochastic programming: From data to decisions. In Tutorials in Operations Research, pp. 115–138. INFORMS.
[73] Ruszczynski, A. (2006). Interior point methods in stochastic programming. In Advanced Topics in Linear Programming, pp. 27–46. Springer.
[74] Kuhn, D., Strauss, A. K., & Wolle, D. (2022). The wait-and-see solution is not always valid for evaluating stochastic programs. Operations Research Letters, 50(5), 732–737.
[75] Bertsimas, D., & Sim, M. (2004). The price of robustness. Operations Research, 52(1), 35–53.
[76] Rockafellar, R. T., & Uryasev, S. (2000). Optimization of conditional value-at-risk. Journal of Risk, 2(3), 21–41.
[77] Ban, G.-Y., & Rudin, C. (2019). The big data newsvendor: Practical insights from machine learning. Operations Research, 67(1), 90–108.
[78] Joe, H. (2014). Dependence Modeling with Copulas. Chapman & Hall/CRC.
[79] Dumouchelle, J., Patel, R., Khalil, E. B., & Bodur, M. (2022). Neur2SP: Neural two-stage stochastic programming. arXiv preprint arXiv:2205.12006.
[80] Kotary, J., Fioretto, F., Van Hentenryck, P., & Wilder, B. (2021). End-to-end constrained optimization learning: A survey. arXiv preprint arXiv:2103.16378.
Published
2026-04-17
How to Cite
A.D.Sarange, & K. Y. Ingale. (2026). DATA-DRIVEN TWO-STAGE STOCHASTIC PROGRAMMING FOR SUPPLY CHAIN NETWORK DESIGN UNDER DEMAND AND LEAD-TIME UNCERTAINTY. IJRDO -JOURNAL OF MATHEMATICS, 12(1), 35-59. https://doi.org/10.69980/m.v12i1.6637
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