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1. When Variability Trumps Volatility: Optimal Control and Value of Reverse Logistics in Supply Chains with Multiple Flows of Product

   Angelus, Alex ; Özer, Özalp ( December 2019 , Manufacturing service operations management)

   Reverse logistics has been gaining recognition in practice (and theory) for helping companies better match supply with demand, and thus reduce costs in their supply chains. In this paper, we study reverse logistics from the perspective of a supply chain in which each location can initiate multiple flows of product. Our first objective is to jointly optimize ordering decisions pertaining to regular, reverse and expedited flows of product in a stochastic, multi-stage inventory model of a logistics supply chain, in which the physical transformation of the product is completed at the most upstream location in the system. Due to those multiple flows of product, the feasible region for the problem acquires multi-dimensional boundaries that lead to the curse of dimensionality. To address this challenge, we develop a different solution method that allows us to reduce the dimensionality of the feasible region and, subsequently, identify the structure of the optimal policy. We refer to this policy as a nested echelon base-stock policy, as decisions for different product flows are sequentially nested within each other. We show that this policy renders the model analytically and numerically tractable. Our results provide actionable policies for firms to jointly manage three different product flows in their supply chains, and allow us arrive at insights regarding the main drivers of the value of reverse logistics. One of our key findings is that, when it comes to the value generated by reverse logistics, demand variability (i.e., demand uncertainty across periods) matters more than demand volatility (i.e., demand uncertainty within each period). This is because, in the absence of demand variability, it is effectively never optimal to return product upstream, regardless of the level of inherent demand volatility. Our second objective is to extend our analysis to product transforming-supply chains, in which product transformation is allowed to occur at each location. In such a system, it becomes necessary to keep track of both the location and stage of completion of each unit of inventory, so that the number of state and decisions variables increases with the square of the number of locations in the system. To analyze such a supply chain, we first identify a policy that provides a lower bound on the total cost. Then, we establish a special decomposition of the objective cost function that allows us to propose a novel heuristic policy. We find that the performance gap of our heuristic policy relative to the lower-bounding policy averages less than 5% across a range of parameters and supply chain lengths. 

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2. Heuristics for Base‐Stock Levels in Multi‐Echelon Distribution Networks

   https://doi.org/10.1111/poms.12717  

   Rong, Ying ; Atan, Zümbül ; Snyder, Lawrence V. ( June 2017 , Production and Operations Management)

   We study inventory optimization for locally controlled, continuous‐review distribution systems with stochastic customer demands. Each node follows a base‐stock policy and a first‐come, first‐served allocation policy. We develop two heuristics, therecursive optimization(RO) heuristic and thedecomposition‐aggregation(DA) heuristic, to approximate the optimal base‐stock levels of all the locations in the system. The RO heuristic applies a bottom‐up approach that sequentially solves single‐variable, convex problems for each location. The DA heuristic decomposes the distribution system into multiple serial systems, solves for the base‐stock levels of these systems using the newsvendor heuristic of Shang and Song (2003), and then aggregates the serial systems back into the distribution system using a procedure we call “backorder matching.” A key advantage of the DA heuristic is that it does not require any evaluation of the cost function (a computationally costly operation that requires numerical convolution). We show that, for both RO and DA, changing some of the parameters, such as leadtime, unit backordering cost, and demand rate, of a location has an impact only on its own local base‐stock level and its upstream locations’ local base‐stock levels. An extensive numerical study shows that both heuristics perform well, with the RO heuristic providing more accurate results and the DA heuristic consuming less computation time. We show that both RO and DA are asymptotically optimal along multiple dimensions for two‐echelon distribution systems. Finally, we show that, with minor changes, both RO and DA are applicable to the balanced allocation policy.

    

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3. Data Pooling in Stochastic Optimization

   https://doi.org/10.1287/mnsc.2020.3933  

   Gupta, Vishal ; Kallus, Nathan ( January 2021 , Management Science)

   null (Ed.)

   Managing large-scale systems often involves simultaneously solving thousands of unrelated stochastic optimization problems, each with limited data. Intuition suggests that one can decouple these unrelated problems and solve them separately without loss of generality. We propose a novel data-pooling algorithm called Shrunken-SAA that disproves this intuition. In particular, we prove that combining data across problems can outperform decoupling, even when there is no a priori structure linking the problems and data are drawn independently. Our approach does not require strong distributional assumptions and applies to constrained, possibly nonconvex, nonsmooth optimization problems such as vehicle-routing, economic lot-sizing, or facility location. We compare and contrast our results to a similar phenomenon in statistics (Stein’s phenomenon), highlighting unique features that arise in the optimization setting that are not present in estimation. We further prove that, as the number of problems grows large, Shrunken-SAA learns if pooling can improve upon decoupling and the optimal amount to pool, even if the average amount of data per problem is fixed and bounded. Importantly, we highlight a simple intuition based on stability that highlights when and why data pooling offers a benefit, elucidating this perhaps surprising phenomenon. This intuition further suggests that data pooling offers the most benefits when there are many problems, each of which has a small amount of relevant data. Finally, we demonstrate the practical benefits of data pooling using real data from a chain of retail drug stores in the context of inventory management. This paper was accepted by Chung Piaw Teo, Special Issue on Data-Driven Prescriptive Analytics. 

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4. Robust Dynamic Pricing with Demand Learning in the Presence of Outlier Customers

   https://doi.org/10.1287/opre.2022.2280  

   Chen, Xi ; Wang, Yining ( April 2022 , Operations Research)

   This paper studies a dynamic pricing problem under model misspecification. To characterize model misspecification, we adopt the ε-contamination model—the most fundamental model in robust statistics and machine learning. In particular, for a selling horizon of length T, the online ε-contamination model assumes that demands are realized according to a typical unknown demand function only for [Formula: see text] periods. For the rest of [Formula: see text] periods, an outlier purchase can happen with arbitrary demand functions. The challenges brought by the presence of outlier customers are mainly due to the fact that arrivals of outliers and their exhibited demand behaviors are completely arbitrary, therefore calling for robust estimation and exploration strategies that can handle any outlier arrival and demand patterns. We first consider unconstrained dynamic pricing without any inventory constraint. In this case, we adopt the Follow-the-Regularized-Leader algorithm to hedge against outlier purchase behavior. Then, we introduce inventory constraints. When the inventory is insufficient, we study a robust bisection-search algorithm to identify the clearance price—that is, the price at which the initial inventory is expected to clear at the end of T periods. Finally, we study the general dynamic pricing case, where a retailer has no clue whether the inventory is sufficient or not. In this case, we design a meta-algorithm that combines the previous two policies. All algorithms are fully adaptive, without requiring prior knowledge of the outlier proportion parameter ε. Simulation study shows that our policy outperforms existing policies in the literature. 

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5. Operations Design of Modular Vehicles on an Oversaturated Corridor with First-in, First-out Passenger Queueing

   https://doi.org/10.1287/trsc.2021.1074  

   Shi, Xiaowei ; Li, Xiaopeng ( August 2021 , Transportation Science)

   null (Ed.)

   Although urban transit systems (UTS) often have fixed vehicle capacity and relatively constant departure headways, they may need to accommodate dramatically fluctuating passenger demands over space and time, resulting in either excessive passenger waiting or vehicle capacity and energy waste. Therefore, on the one hand, optimal operations of UTS rely on accurate modeling of passenger queuing dynamics, which is particularly complex on a multistop transit corridor. On the other hand, capacities of transit vehicles can be made variable and adaptive to time-variant passenger demand so as to minimize energy waste, especially with the emergence of modular vehicle technologies. This paper investigates operations of a multistop transit corridor in which vehicles may have different capacities across dispatches. We specify skewed time coordinates to simplify the problem structure while incorporating traffic congestion. Then, we propose a mixed integer linear programming model that determines the optimal dynamic headways and vehicle capacities over the study time horizon to minimize the overall system cost for the transit corridor. In particular, the proposed model considers a realistic multistop first-in, first-out (MSFIFO) rule that gives the same boarding priority to passengers arriving at a station in the same time interval yet with different destinations. A customized dynamic programming (DP) algorithm is proposed to solve this model efficiently. To circumvent the rapid increase of the state space of a typical DP algorithm, we analyze the theoretical properties of the investigated problem and identify upper and lower bounds to a feasible solution. The bounds largely reduce the state space during the DP iterations and greatly improve the efficiency of the proposed DP algorithm. The state dimensions are also reduced with the MSFIFO rule such that all queues with different destinations at the same origin can be tracked with a single boarding position state variable at each stage. A hypothetical example and a real-world case study show that the proposed DP algorithm greatly outperforms a state-of-the-art commercial solver (Gurobi) in both solution quality and time. 

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