On the Scarcity of Observations when Modelling Random Inputs and the Quality of Solutions to Stochastic Optimisation Problems

Abstract

Most of the literature on supply chain management assumes that the demand distributions and their parameters are known with certainty. However, this may not be the case in practice since decision makers may have access to limited amounts of historical demand data only. In this case, treating the demand distributions and their parameters as the true distributions is risky, and it may lead to sub-optimal decisions. To demonstrate this, this paper considers an inventory-routing problem with stochastic demands, in which the retailers have access to limited amounts of historical demand data. We use simheuristic method to solve the optimisation problem and investigate the impact of the limited amount of demand data on the quality of the simheuristic solutions to the underlying optimisation problem. Our experiment illustrates the potential impact of input uncertainty on the quality of the solution provided by a simheuristic algorithm.