Fenchel decomposition for stochastic mixed‐integer programming

This paper introduces a new cutting plane method for two‐stage stochastic mixed‐integer programming (SMIP) called Fenchel decomposition (FD). FD uses a class of valid inequalities termed, FD cuts, which are derived based on Fenchel cutting planes from integer programming. First, we derive FD cuts based on both the first and second‐stage variables, and devise an FD algorithm for SMIP and establish finite convergence for binary first‐stage. Second, we derive FD cuts based on the second‐stage variables only and use an idea from disjunctive programming to lift the cuts to the higher dimension space including the first‐stage variables. We then devise an alternative algorithm (FD‐L algorithm) based on the lifted FD cuts. Finally, we report on computational results based on several test instances from the literature involving the special structure of knapsack problems with nonnegative left‐hand side coefficients. The results are promising and show that both algorithms can outperform a standard direct solver and a disjunctive decomposition algorithm on large‐scale instances. Furthermore, the FD‐L algorithm provides better performance than the FD algorithm in general. Since Fenchel cuts can be computationally expensive in general and are best suited for problems with special structure, both algorithms exploit the special structure of the test instances by reducing the size of the cut generation problems based on the number of nonzero components in the non‐integer solution that needs to be cut off.