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Problem-based scenario generation by decomposing output distributions

Author

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  • Narum, Benjamin S.
  • Fairbrother, Jamie
  • Wallace, Stein W.

Abstract

Scenario generation is required for most applications of stochastic programming to evaluate the expected effect of decisions made under uncertainty. We propose a novel and effective problem-based scenario generation method for two-stage stochastic programming that is agnostic to the specific stochastic program and kind of distribution. Our contribution lies in studying how an output distribution may change across decisions and exploit this for scenario generation. From a collection of output distributions, we find a few components that largely compose these, and such components are used directly for scenario generation. Computationally, the procedure relies on evaluating the recourse function over a large discrete distribution across a set of candidate decisions, while the scenario set itself is found using standard and efficient linear algebra algorithms that scale well. The method’s effectiveness is demonstrated on four case study problems from typical applications of stochastic programming to show it is more effective than its distribution-based alternatives. Due to its generality, the method is especially well suited to address scenario generation for distributions that are particularly challenging.

Suggested Citation

  • Narum, Benjamin S. & Fairbrother, Jamie & Wallace, Stein W., 2024. "Problem-based scenario generation by decomposing output distributions," European Journal of Operational Research, Elsevier, vol. 318(1), pages 154-166.
    • Handle: RePEc:eee:ejores:v:318:y:2024:i:1:p:154-166
    DOI: 10.1016/j.ejor.2024.04.006
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    References listed on IDEAS

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    1. Vaagen, Hajnalka & Wallace, Stein W. & Kaut, Michal, 2011. "Modelling consumer-directed substitution," International Journal of Production Economics, Elsevier, vol. 134(2), pages 388-397, December.
    2. Vaagen, Hajnalka & Wallace, Stein W., 2008. "Product variety arising from hedging in the fashion supply chains," International Journal of Production Economics, Elsevier, vol. 114(2), pages 431-455, August.
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    5. Vit Prochazka & Stein W. Wallace, 2020. "Scenario tree construction driven by heuristic solutions of the optimization problem," Computational Management Science, Springer, vol. 17(2), pages 277-307, June.
    6. Zhaoxia Guo & Stein W. Wallace & Michal Kaut, 2019. "Vehicle Routing with Space- and Time-Correlated Stochastic Travel Times: Evaluating the Objective Function," INFORMS Journal on Computing, INFORMS, vol. 31(4), pages 654-670, October.
    7. Vit Prochazka & Stein W. Wallace, 2018. "Stochastic programs with binary distributions: structural properties of scenario trees and algorithms," Computational Management Science, Springer, vol. 15(3), pages 397-410, October.
    8. Julien Keutchayan & Janosch Ortmann & Walter Rei, 2023. "Problem-driven scenario clustering in stochastic optimization," Computational Management Science, Springer, vol. 20(1), pages 1-33, December.
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