Retailer–supplier flexible commitments contracts: A robust optimization approach

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.