Stochastic programming approach to re-designing a warehouse network under uncertainty

The warehouse network re-design problem includes integrating or eliminating existing warehouses and establishing new sites. In this paper, we incorporate variability in product demand and operational costs with a two-stage stochastic modeling approach. We use the Sample Average Approximation (SAA) approach together with Benders decomposition to provide a solution method. Our results indicate not only that the stochastic solution is an improvement over the deterministic solution but also that the solutions’ differences grow with increasing uncertainty. The stochastic solutions show more robustness than the deterministic solutions. The computational results show that a change in the type of probability distribution of the stochastic parameters does not significantly affect the value of the stochastic solutions.

► We model a warehouse network re-design problem under uncertainty situation. ► A two stage stochastic program used to incorporate variabilities to model. ► Solution schem is based on sample average approximation and benders decomposition. ► Stochastic solutions result in lower costs compared with deterministic solution. ► Stochastic solutions show more robustness than the deterministic solutions.