A risk management method for the operation of a supply-chain without storage: - Supply policy optimization under demand risk

Abstract

A business risk management method has been developed for a supply-chain without a storage function under demand uncertainty. Power supply players in the deregulated power market face the need to develop the best policies for power supply from self-production and reserved purchases to balance demand, which is predictable with error. The proposed method maximizes profit from the operation of the supply-chain under probabilistic demand uncertainty on the basis of a probabilistic programming approach. Piece-wise linear functions are employed to formulate the impact of under-booked or over-booked purchases on the supply cost, and constraints on over-demand probability are introduced to limit over-demand frequency on the basis of the demand probability distribution. The developed method has been experimentally applied to the supply policy of a power-supply-chain, the operation of which is based on a 3-stage pricing purchase contract and on 28 time zones. The characteristics of the obtained optimal supply policy are successfully captured in the numerical results, which suggest the applicability of the proposed method.