On the Value of Risk-Averse Multistage Stochastic Programming in Capacity Planning

Xian Yu () and Siqian Shen ()
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Xian Yu: Department of Integrated Systems Engineering, The Ohio State University, Columbus, Ohio 43210
Siqian Shen: Department of Industrial and Operations Engineering, University of Michigan, Ann Arbor, Michigan 48109

INFORMS Journal on Computing, 2025, vol. 37, issue 5, 1143-1162

Abstract: We consider a risk-averse stochastic capacity planning problem under uncertain demand in each period. Using a scenario tree representation of the uncertainty, we formulate a multistage stochastic integer program to adjust the capacity expansion plan dynamically as more information on the uncertainty is revealed. Specifically, in each stage, a decision maker optimizes capacity acquisition and resource allocation to minimize certain risk measures of maintenance and operational cost. We compare it with a two-stage approach that determines the capacity acquisition for all the periods up front. Using expected conditional risk measures, we derive a tight lower bound and an upper bound for the gaps between the optimal objective values of risk-averse multistage models and their two-stage counterparts. Based on these derived bounds, we present general guidelines on when to solve risk-averse two-stage or multistage models. Furthermore, we propose approximation algorithms to solve the two models more efficiently, which are asymptotically optimal under an expanding market assumption. We conduct numerical studies using randomly generated and real-world instances with diverse sizes, to demonstrate the tightness of the analytical bounds and efficacy of the approximation algorithms. We find that the gaps between risk-averse multistage and two-stage models increase as the variability of the uncertain parameters increases and decrease as the decision maker becomes more risk averse. Moreover, a stagewise-dependent scenario tree attains much higher gaps than a stagewise-independent counterpart, whereas the latter produces tighter analytical bounds.

Keywords: multistage stochastic integer programming; risk-averse optimization; dynamic time-consistent risk measure; approximation algorithms; capacity planning (search for similar items in EconPapers)
Date: 2025
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