Analytics with stochastic optimisation: experimental results of demand uncertainty in process industries

Abstract

This study reports the test results of a two-stage stochastic linear programming (SLP) model with recourse using a user-friendly generic decision support system (DSS) in a North American steel company. This model has the flexibility to configure multiple material facilities, activities and storage areas in a multi-period and multi-scenario environment. The value of stochastic solution (VSS) with a real-world example has a potential benefit of US$ 24.61 million. Experiments were designed according to the potential joint probability distribution scenarios and the magnitude of demand variability. Overall, 144 SLP optimisation model instances were solved across four industries, namely, steel, aluminium, polymer and pharmaceuticals. The academic contribution of this research is two-fold: first, the potential contribution to profit in a steel company using an SLP model; and second, the optimisation empirical experiments confirm a pattern that the VSS and expected value of perfect information (EVPI) increase with the increase in demand variability. This study has implications for practicing managers seeking business solutions with prescriptive analytics using stochastic optimisation-based DSS. This study will attract more industry attention to business solutions, and the prescriptive analytics discipline will garner more scholarly and industry attention.

KEYWORDS:

• Decision support system
• iron and steel industry
• planning with optimisation
• stochastic programming
• EVPI
• VSS

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

I on behalf of all the authors confirm that we would share the data used in this research as demanded during the publication process.

Additional information

Notes on contributors

Narain Gupta

Narain Gupta is a professor and a distinguished faculty of Operations Management area at Management Development Institute, India. He has more than 15 research papers in ABDC A journals. He has published in reputed journals Decision Support System, Journal of Enterprise Information Management, Journal of Knowledge Management, International Journal of Production Economics, International Journal of Production Research, Computers & Industrial Engineering, The Journal of Operations Research Society, International Journal Consumer Studies, Journal of Cleaner Production, International Business Review, EPW, Global Journal of Flexible Systems Manufacturing. He is a visiting professor of Arhus University, Denmark, IMT Dubai. He steered the AACSB project for his school from concept to delivery.

Goutam Dutta

Goutam Dutta is a retired faculty member of IIM Ahmedabad. He is currently a Visiting Faculty (online) at IIM, Amritsar. He is the joint winner of Franz Edelman Prize of INFORMS (1994), IFORS OR for Development Prize (1993), Finalist EURO Excellence in Practice Prize (2006), P C Mahalanobis Distinguished Educator Award (2018). His papers have been published in MSOM, DSS, IJEPES, JORS, JCEM (ASCE), IJPE, CAIE, IJPR, JRPM, IJRM, JRPM, ITOR, IJAA (INFORMS). He is the editorial board of JORS, IJAA(INFORMS), IJRM and OPSEARVH. He is Fellow of ORSI (India) and Institutions of Engineers, India and former President of ORSI.

Krishnendranath Mitra

Krishnendranath Mitra obtained his Ph.D. in Management from the University of Calcutta, India, in 2021, his MBM degree in Marketing Management from University of Calcutta, India, in 2011 and his B.Tech. degree in Power Engineering from National Power Training Institute, Durgapur, India, in 2008. His research interests include revenue management, optimisation and mathematical modelling. He has more than 200 citations for his research papers.

Manoj Kumar Tiwari

Manoj Kumar Tiwari (FNAE, FNASc, FIISE), Prof., is Director, National Institute of Industrial Engineering (NITIE), Mumbai, India. He is also a Professor in the Department of Industrial and Systems Engineering at the Indian Institute of Technology, Kharagpur, India. He received B.E. in Mechanical Engineering from Visvesvaraya National Institute of Technology, Nagpur, India, in 1986, M.Tech. in Production Engineering from Motilal Nehru National Institute of Technology, Prayagraj, India, in 1990, and Ph.D. in the Department of Production Engineering from University of Jadavpur. He is actively involved in research relevant to the applications of optimisation, modelling, decision support systems, and data mining in the domain of logistics, supply chain management, and manufacturing systems.