Optimal supply chain design and operations under multi‐scale uncertainties: Nested stochastic robust optimization modeling framework and solution algorithm

Abstract

Although strategic and operational uncertainties differ in their significance of impact, a “one‐size‐fits‐all” approach has been typically used to tackle all types of uncertainty in the optimal design and operations of supply chains. In this work, we propose a stochastic robust optimization model that handles multi‐scale uncertainties in a holistic framework, aiming to optimize the expected economic performance while ensuring the robustness of operations. Stochastic programming and robust optimization approaches are integrated in a nested manner to reflect the decision maker's different levels of conservativeness toward strategic and operational uncertainties. The resulting multi‐level mixed‐integer linear programming model is solved by a decomposition‐based column‐and‐constraint generation algorithm. To illustrate the application, a county‐level case study on optimal design and operations of a spatially‐explicit biofuel supply chain in Illinois is presented, which demonstrates the advantages and flexibility of the proposed modeling framework and efficiency of the solution algorithm. © 2016 American Institute of Chemical Engineers AIChE J, 62: 3041–3055, 2016