Price of robustness optimization through demand forecasting with an application to waste management

Abstract

AbstractRobust optimization can be effectively used to protect production plans against uncertainties. This is particularly important in sectors where variability is inherent the process to be planned. The drawback of robust optimization is the chance of producing over-conservative solutions with respect to the real occurrences of the stochastic parameters. Information can be added in order to better control the extra cost resulting from considering the parameter variability. This work investigates how demand forecasting can be used in conjunction with robust optimization in order to achieve an optimal planning while considering demand uncertainties. In the proposed procedure, forecast is used to update uncertain parameters of the robust model. Moreover, the robustness budget is optimized at each planned stage in a rolling planning horizon. In this way, the parameters of the robust model can be dynamically updated tacking information from the data. The study is applied to a reverse logistics case, where the planning of sorting for material recycling is affected by uncertainties in the demand, consisting of waste material to be sorted and recycled. Results are compared with a standard robust optimization approach, using real case instances, showing potentialities of the proposed method.