International Journal of Production Research, 2017

Vol. 55, No. 7, 1845–1861, http://dx.doi.org/10.1080/00207543.2016.1174788

A simulation-optimisation approach for supply chain network design under supply and demand
uncertainties
Roba W. Salem and Mohamed Haouari∗
Department of Mechanical and Industrial Engineering, College of Engineering, Qatar University, Doha, Qatar
(Received 10 October 2015; accepted 29 March 2016)

We investigate a three-echelon stochastic supply chain network design problem. The problem requires selecting suppliers,
determining warehouses locations and sizing, as well as the material flows. The objective is to minimise the total expected cost.
An important feature of the investigated problem is that both the supply and the demand are uncertain. We solve this problem
using a simulation-optimisation approach that is based on a novel hedging strategy that aims at capturing the randomness
of the uncertain parameters. To determine the optimal hedging parameters, the search process is guided by particle swarm
optimisation procedure. We present the results of extensive computational experiments that were conducted on a large set of
instances and that provide evidence that the proposed hedging strategy constitutes an effective viable solution approach.
Keywords: Monte Carlo method; supply chain design; particle swarm optimisation; simulation optimisation; demand
uncertainty; supply uncertainty

1. Introduction
Supply chain network design (SCND) deals with strategic decisions such as deciding on the number, location, capacities and
technologies of facilities to be opened, changes to existing facilities, and supplier selection. In addition, it includes tactical
decisions such as production and shipping plans as well as material flows through the network. So far, deterministic models
have been widely used for modelling complex supply chain planning problems. For example, in the review paper by Melo,
Nickel, and Saldanha-Da-Gama (2009), the authors found that the literature on supply chain management (SCM) which
considered uncertain parameters is still scarce. Though, and despite their (relative) simplicity, deterministic supply chain
planning models are likely to produce inferior results because they do not capture the inherent uncertainty along the supply
chain. Gupta and Maranas (2003) have pointed out the following main shortcomings that may result from ignoring uncertainty
in decision making: (i) the impact of uncertainty if underestimated may lead to planning decisions that are not able to protect
a company against risk or may result in lost opportunities, (ii) deterministic planning models, which do not recognise the
uncertainty in the future demand forecasts for example, can be expected to result in inferior planning decisions compared to
models that explicitly account for the uncertainty, (iii) the assumption of complete and deterministic information, is highly
optimistic given that supply chains are characterised by numerous sources of uncertainty.
To overcome these shortcomings, an increasing effort has been recently devoted to the development of novel supply
chain design models that accommodate (at least, to some extent) supply chains uncertainties. These uncertainties could be
caused either by internal or external sources.
In this paper, we investigate a stochastic SCND problem. More precisely, we address the issue of designing an optimal
configuration of a three-echelon supply chain network where the first echelon includes a set of potential suppliers (or plants),
the second one includes a set of potential warehouses, and the third echelon refers to a set of markets. The problem requires
to determine a selection of suppliers (location and sizing), location and sizing of warehouses, as well as the material flows
between the different echelons. An important feature of the problem under consideration is that both the supply and the
demand are uncertain. We solve this problem using a simulation-optimisation approach. More precisely, we describe a novel
hedging strategy that amounts to modifying the expected quantities that are ordered by the warehouses to cope with the
randomness of uncertain parameters. To determine the optimal hedging quantities, a simulation-optimisation approach is
developed. The main components of this approach are: (i) a deterministic mixed-integer linear program (MILP) that is solved
iteratively, (ii) a Monte Carlo simulation routine that provides estimates of the expected cost, and (iii) a particle swarm
optimisation (PSO) procedure that aims at guiding the search process.
The remainder of this paper is organised as follows. In Section 2, we present a literature review of the main modelling
approaches that were used so far for solving stochastic SCND problems. In Section 3, we propose a detailed description of the
∗ Corresponding author. Email: mohamed.haouari@qu.edu.qa

© 2016 Informa UK Limited, trading as Taylor & Francis Group

1846 R.W. Salem and M. Haouari

problem as well as a mathematical formulation of the investigated model. In Section 4, we describe the proposed simulation-
optimisation solution approach. In Section 5, we present the results of computational experiments that were carried out to
assess the performance of the proposed approach. Finally, in Section 6, some concluding remarks are provided together with
some directions for future research.

2. Literature review
In this section, we present related literature survey. The section is divided into two subsections. The first Section 2.1
presents general supply chain uncertainties definition and categorisations. Section 2.2 presents a review of some modelling
methodologies that were used for solving stochastic SCND and related sample papers.

2.1 Uncertainty and SCM

Van der Vorst and Beulens (2002) defined supply chain uncertainty as ‘Decision Making situations in the supply chain in which
the decision-maker does not know definitely what to decide as he is indistinct about the objectives; lacks information about (or
understanding of) the supply chain or its environment; lacks information processing capacities; is unable to accurately predict
the impact of possible control actions on supply chain behaviour; or, lacks effective control actions (non-controllability)’.
Miller (1992) mentioned that the presence of uncertainty of some variables reduces the expected corporate performance and
therefore increases risk. Also he has pointed that a company’s strategic choices determine its exposure to environmental and
organisational uncertainties where exposure is referred as the sensitivity of performance to changes in uncertain variables and
that dealing with uncertainties with isolation is a sub-optimal approach. Uncertainties should be treated in an integrated way
considering various uncertainties explicitly. Being aware of the negative impact of uncertainties on corporate performance,
the decision-maker creates safety buffers in time, capacity or inventory (Chopra and Sodhi 2004; Van der Vorst and Beulens
2002). This is a big challenge since these buffers will restrict operational performances and suspend competition (Van der
Vorst and Beulens 2002). Davis (1993) has indicated that the main problem with complex networks is the uncertainty that
plagues them. He has mentioned that dealing with uncertainty in a single factory, for example, is much easier than considering
the whole network because simply ‘uncertainty propagates through the manufacturing network’. Therefore, any approach to
managing risks from a supply chain perspective must have a broader scope than that of a single organisation and provide
insights regarding how the key processes have to be performed across at least three organisations (Jüttner 2005).
Miller (1992) provided a framework for categorising various interrelated uncertainties faced by firms operating inter-
nationally. From managerial point of view, three categories are identified: general environment are uncertainties affecting
business across different industry sectors that are not related neither to a specific industry nor to a specific firm. They
include political instability, government policy instability, macroeconomic uncertainties, social uncertainties and natural
uncertainties. Detailed discussions on each of these uncertainties is found in Miller (1992), Rao and Goldsby (2009). On
the second level are the industry uncertainties. These uncertainties affect a specific industry and not all economy sectors
(Rao and Goldsby 2009). They include input market uncertainty, product market uncertainty, and competitive uncertainty.
At the lowest level are the firm-specific uncertainties including operating, liability, research and development, credit, and
behavioural uncertainties. Operating uncertainties are divided into three subcategories: (1) labour uncertainties, (2) input
supply uncertainties, (3) production uncertainties.
With respect to global supply chain risk management, Manuj and Mentzer (2008) have divided the risks into the following
categories: supply risks, operations risk, demand risks, security risks, macroeconomic risks, policy risks, competitive
risks, and resource risks and provided some discussions for the first four categories claiming that the first four are primarily
affecting the objective of supply chain of matching supply with demand and that the rest of the risks can be covered
under supply, operations, demand and security risks. Singh et al. (2012) have modeled a global SCND problem considering
production, distribution risk, demand risk, supply risk, and interaction risk. The applicability of the model was tested on
several scenarios.
Tang (2006) has reviewed quantitative models considering supply chain risks. Risks are categorised as (1) operational
risks which are the inherent uncertainties of demand, supply and cost, (2) disruption risks which are high impact risks such
as natural disasters and economic crisis. In the mentioned paper, four approaches of risk mitigation strategies were proposed:
(1) supply management, (2) demand management, (3) product management and (4) information management. Under supply
management, reported models included uncertain supply yields, uncertain lead times, uncertain supply capacity and uncertain
supply cost. Uncertain demand management included strategies such as shifting demand across time, shifting demand across
markets, and shifting demand across products. Information sharing initiatives such as (1) vendor managed inventory, (2)
collaborative forecasting models are discussed in information management strategies. Coordination and collaboration among
different supply chain parties improves the performance of supply chains under uncertainty.
 International Journal of Production Research 1847

2.2 SCND under uncertainty

The available literature surveys on the topic of SCND suggest that large number of supply chain models are assumed
deterministic. For example, in their Paper, Melo, Nickel, and Saldanha-Da-Gama (2009) have concluded that the literature
on SCM which considered uncertain parameters is still scarce. Facility location models under uncertainty were discussed in
Owen and Daskin (1998) and were discussed in more details in Snyder (2006). In addition, the paper by Klibi, Martel, and
Guitouni (2010) presents a thorough review on SCND under uncertainty by discussing internal and external sources of supply
chain uncertainties. Below, we present a review of some modelling methodologies that were used so far for solving stochastic
SCND problems. These approaches are the following: stochastic programming, robust optimisation, fuzzy programming,
simulation and simulation optimisation.
• Stochastic programming
The goal of stochastic programming is to use mathematical programming for finding a network design while
optimising the expected performance (e.g. minimising the expected cost or maximising the expected profit).
Stochastic programming has been extensively used for modelling SCND problems under uncertainty. Stochastic
programs may model one source of uncertainty (Cardona-Valdés, Álvarez, and Ozdemir 2011; Guillén et al. 2005;
Schütz, Tomasgard, and Ahmed 2009), two sources (Amin and Zhang 2013; Listeş 2007; Lin and Wang 2011; Nickel,
Saldanha-da Gama, and Ziegler 2012; Salema, Barbosa-Povoa, and Novais 2007; Zeballos et al. 2014), or three or
more sources (Pishvaee, Jolai, and Razmi 2009; Santoso et al. 2005). The model can be of the form of a single-
objective stochastic program (Lin and Wang 2011; Nickel, Saldanha-da Gama, and Ziegler 2012; Pishvaee, Jolai,
and Razmi 2009; Santoso et al. 2005; Salema, Barbosa-Povoa, and Novais 2007; Schütz, Tomasgard, and Ahmed
2009; Zeballos et al. 2014), or could be extended to bi- or multi-objective (Amin and Zhang 2013; Cardona-Valdés,
Álvarez, and Ozdemir 2011; Guillén et al. 2005).
• Robust optimisation
Robust optimisation aims at providing network designs that perform well under worst-case scenarios. That is, the
objective is to build a network design while minimising the maximum cost or maximising the minimum profit.
A robust optimisation model was proposed in Pishvaee, Rabbani, and Torabi (2011) for the design of a closed loop
supply chain (CLSC) network under uncertain demand, quantity of returns and transportation costs. Reference Pan
and Nagi (2010) considers a SCND for a new market opportunity in an agile manufacturing environment under
demand uncertainty. In reference Kaya, Bagci, and Turkay (2014), a robust optimisation model and a two-stage
stochastic programming model are proposed for a CLSC involving disassembly and refurbishing and considering
strategic and tactical decisions. In addition to the above studies, we refer to Mudchanatongsuk, Ordóñez, and Liu
(2008) for a single-objective robust model, or to Azaron et al. (2008) for multi-objective robust stochastic model in
opened-loop supply chain setting.
• Fuzzy programming
A wide range of fuzzy models were used in stochastic SCND literature ranging from single-objective fuzzy models
(Bouzembrak et al. 2013; Fazlollahtabar, Mahdavi, and Mohajeri 2013; Jindal and Sangwan 2014; Tabrizi and Razmi
2013; Xu, He, and Gen 2009) to bi- or multi-objective fuzzy models (Chen, Yuan, and Lee 2007; Fallah-Tafti 2014;
Pishvaee and Torabi 2010; Pishvaee and Razmi 2012; Ramezani et al. 2014; Selim and Ozkarahan 2008; Vahdani
et al. 2013). In this regard, a bi-objective possibilitic MILP is proposed by Pishvaee and Torabi (2010) to model a
CLSC network that integrates forward and reverse supply chains, integrates strategic and tactical planning decisions,
considering multiple periods, but a single product flow.
The paper by Chen, Yuan, and Lee (2007) considers multi-product, multi-period, and multi-echelon SCND problem
considering multiple objectives. The two-phase fuzzy optimisation strategy proposed by Chen and Lee (2004) is
used and it was found efficient in getting a more compromised solution for the satisfaction level of the considered
objectives.
In Tabrizi and Razmi (2013), a mixed-integer non-linear programming model for a multi-echelon, multi-capacity,
multi-source and multi-product SCND problem was constructed. Supply, demand, costs and capacities are uncertain
and are represented by fuzzy set theory. Reference Xu, He, and Gen (2009) considered a multi-stage SCND problem
in which uncertain parameters including supply, demand and costs are represented by fuzzy numbers.
• Simulation
In reference Persson and Olhager (2002), the authors have simulated a real-case system which is concerned with
the manufacturing of mobile communication system. The main objective of the study was to evaluate supply chain
design alternatives with respect to key performance measures (e.g. quality, lead time, cost). In Reiner and Trcka
(2004), the authors have considered a product-specific supply chain in the food industry (e.g. pasta manufacturing).
Data were collected and simulation models were constructed. The study Van der Vorst, Beulens, and van Beek
1848 R.W. Salem and M. Haouari

(2000) applied discrete-event simulation to evaluate alternative designs on both strategic and operational levels for
food supply chain (i.e. chilled food products). System dynamics was utilised in Wikner, Towill, and Naim (1991) to
evaluate the impact of several strategies on supply chain dynamics (demand amplification). In Vos and Akkermans
(1996), a strategic decision problem of plant relocation was considered and the dynamics of such strategic movement
were captured via system dynamic and simulation.
• Simulation-optimisation
In their study, Ding, Benyoucef, and Xie (2006) presents a simulation based on multi-objective optimisation approach
for SCND problem. In Yoo, Cho, and Yücesan (2010), the authors have applied a discrete-event simulation-based
optimisation approach for SCND problem. Reference Truong and Azadivar (2003) combined MIP, simulation and
genetic algorithm (GA) to solve a SCND problem involving several strategic decisions.
Some more relevant papers that consider supply chain uncertainty and PSO are Kadadevaramath et al. (2012) and Aydin
and Murat (2013). In Kadadevaramath et al. (2012), the authors have modelled a three-echelon supply chain considering
demand uncertainty. Four PSO variants were used to solve the problem along with GA and results were compared. On the
other hand, Aydin and Murat (2013) have proposed a swarm intelligence-based sample average approximation (SIBSAA)
to solve the capacitated reliable facility location problem (CRFLP). The problem was formulated as a two-stage stochastic
program. The results of the study have shown that the hybrid approach has improved the efficiency and the quality of the
solutions obtained. Alternatively, SIBSAA was used in similar SCND problems as a solution method in combination with
dual decomposition (Santoso et al. 2005; Schütz, Tomasgard, and Ahmed 2009). The study by Schütz, Tomasgard, and
Ahmed (2009) has dealt with a supply chain design problem which was formulated as a two-stage problem and involved
long- and short-term uncertainties. In Santoso et al. (2005), the authors have considered a SCND problem under uncertainty.
The proposed approach proved its efficacy to handle stochastic and large-scale problems. Another paper by Benyoucef, Xie,
and Tanonkou (2013) has presented an approach that combines SIBSAA and the Lagrangian relaxation to solve non-linear
stochastic programming problem of facility location/supplier reliability. Lastly, Lee and Dong (2009) have considered the
design of a dynamic and stochastic reverse logistics network. To account for uncertainty, a two-stage stochastic program
was developed where demand and supply of returned products where assumed uncertain and following a known probability
distribution. The proposed solution methodology integrates SIBSAA with simulated annealing heuristic. The results show
that the proposed solution is much closer to being optimal than the deterministic approach.

2.2.1 Comment on the published literature

From the sample of papers selected from the literature on modelling techniques, we see that highest percentage (44%) of the
papers use stochastic programming or robust optimisation techniques. On the other hand, 33% of the papers implemented
fuzzy programming models techniques which can handle several sources of uncertainty. However, we observe that simulation
is used by 14% of the papers, and simulation-optimisation approach is relatively scarcely used for solving SCND under
uncertainty problems (8%). In the sequel, we describe a novel approach that adds to the simulation-optimisation literature,
and provides evidence that this latter methodology is effective for solving complex stochastic optimisation problems.

3. Problem description and model formulation

3.1 Notation and formal problem description
In this paper, we investigate a simulation-optimisation approach for solving a SCND problem with uncertain supply and
demand. This problem requires designing a three-echelon supply chain network to achieve an optimal matching between
supply and demand over T consecutive periods of time. The three echelons, or levels refer to plants (or suppliers), warehouses,
and customers, respectively. We denote the number of plants, warehouses, and customers by m, n, and p, respectively. For
each plant i (i = 1, . . . , m), we are given Ri potential capacities. We denote by Q ir the r th capacity of plant i. A fixed cost
f ir is incurred if we operate plant i (i = 1, . . . , m) at capacity Q ir (r = 1, . . . , Ri ). Also, a penalty cost λi is incurred if one
unit of capacity of plant i remains unused during one period of time. Furthermore, we assume that for each supplier, there is
a yield randomness. We denote by θ̃ = (θ̃it ) the stochastic exogenous yield vector. That means that if supplier i receives in
n n
period t, an order of j=1 xi jt units from the n warehouses, then the random delivered quantity is (1 − θit ) j=1 xi jt .
For each warehouse j ( j = 1, . . . , n), we are given L potential capacities. We denote by K jl the lth capacity of warehouse
j. A fixed cost g jl is incurred if we decide to operate warehouse j ( j = 1, . . . , n) at capacity K jl (l = 1, . . . , L). We denote
by h j the cost of holding one unit of inventory at warehouse j during one period of time (we assume that the initial inventory,
hereafter denoted by I j0 , is given for each warehouse j). For each customer k (k = 1, . . . , p), we are given a function dkt (.)
that represents the probability density function of customer k’s demand at period t (t = 1, . . . , T ) (A probability density
 International Journal of Production Research 1849

function is a function representing the relative distribution of a continuous random variable from which parameters such
as its mean and variance can be derived). We denote by d̃ = (d̃kt ) the stochastic exogenous demand vector. Supply chain
risks can be categorised in to endogenous and exogenous risks. Endogenous factors result from the interactions between the
supply chain member firms and shall be reduced by managerial responses. On the other hand, exogenous risks originates
outside the member firms and thus out of the supply chain managers control, but may be reduced as events arise.
The customer demands can only be supplied from warehouses as no inventory capacity is available at the customer
location. Also, for each customer k, unmet demand is lost and not backlogged. A penalty πk is incurred for each shortage of
one unit of demand for customer k. In addition, we assume that we have linear inter-stage variable shipping costs. We denote
by c̄i j the unit cost of producing one unit at plant i and shipping it to warehouse j, and c jk the unit cost of delivering one
unit from warehouse j to customer k. The problem requires finding:
• The set of selected plants and their corresponding capacities
• The set of selected warehouses and their corresponding capacities
• The amounts to be ordered by each warehouse from each plant at each period of time. These orders can only be
placed at the beginning of the planning horizon (i.e. at the beginning of Period 1).
• The amounts to be supplied from each warehouse to each customer at each period of time. These amounts are
determined at the beginning of each period of time t (t = 1, . . . , T ) after receiving the plants’ supplies.
• The inventory at each selected warehouse at the end of period of time.
The objective is to minimise the total expected cost. This cost is the sum of the fixed cost of plants and warehouses, the
expected sum of the shipping costs, holding costs, shortage costs and penalty of unused plants capacities.

3.2 Model formulation

3.2.1 Decision variables
xi jt quantity ordered to plant i from warehouse j in period t, i = 1 . . . , m, j = 1 . . . , n, t = 1 . . . , T
y jkt quantity shipped to from warehouse j to customer k in period t, j = 1 . . . , n, k = 1 . . . , p, t = 1 . . . , T
z kt unmet demand at customer k in period t, k = 1 . . . , p, t = 1 . . . , T
I jt inventory level at warehouse j at the end of period t, j = 1 . . . , n, t = 1
vir binary variable that takes value 1 if plant i is opened with its r th capacity, and 0 otherwise, i = 1 . . . , m, r = 1 . . . , Ri
w jl binary variable that takes value 1 if warehouse j is opened with its lth capacity, and 0 otherwise, j = 1 . . . , n,
l = 1..., L

3.2.2 Formulation of the first-stage model

⎡ ⎛ ⎞⎤

m 
Ri 
n 
L 
m 
T Ri 
n
Minimize f ir vir + g jl w jl + E θ̃it ⎣λi ⎝ Q ir vir − (1 − θ̃it ) xi jt ⎠⎦
i=1 r =1 j=1 l=1 i=1 t=1 r =1 j=1
⎡ ⎤

m 
T 
n  
+ E θ̃it ⎣ c̄i j (1 − θ̃it )xi jt ⎦ + E θ̃ ,d̃  x, θ̃ , d̃ (1)
i=1 t=1 j=1

subject to:

Ri
vir ≤ 1, i = 1 . . . , m, (2)
r =1
L
w jl ≤ 1, j = 1 . . . , n, (3)
l=1
n 
Ri
xi jt ≤ Q ir vir , i = 1 . . . , m, t = 1 . . . , T, (4)
j=1 r =1
vir ∈ {0, 1}, i = 1 . . . , m, r = 1 . . . , Ri , (5)
wir ∈ {0, 1}, j = 1 . . . , n, l = 1 . . . , L , (6)
1850 R.W. Salem and M. Haouari

xi jt ≥ 0, i = 1 . . . , m, j = 1 . . . , n, k = 1 . . . , p, t = 1 . . . , T, (7)

The objective function (1) is the sum of two types of terms. The first type refers to the first-stage problem and it requires
minimising the sum of the fixed cost of the plants and the warehouses, the expected cost of unused plant capacities, and
the expected production and shipping cost from the plants to the warehouses. The second type refers to the second-stage
problem. This latter is made explicit below. Constraints (2) and (3) ensure that at most, one capacity is assigned to each plant
and warehouse, respectively. Constraint (4) enforces that the total ordered amount at each plant at each period of time should
not exceed its capacity.

3.2.3 Formulation of the second stage model

 
n 
T 
p 
T 
n 
p 
T
 x, θ̃ , d̃ = Min h j I jt + πk z kt + c jk y jkt (8)
j=1 t=1 k=1 t=1 j=1 k=1 t=1

subject to


m 
L
I j,t−1 + xi jt ≤ K jl w jl , j = 1 . . . , n, t = 1 . . . , T, (9)
i=1 l=1

p 
m
y jkt + I jt = I j,t−1 + (1 − θ̃it )xi jt , j = 1 . . . , n, t = 1 . . . , T, (10)
k=1 i=1
n
y jkt + z kt = d̃kt , k = 1 . . . , p, t = 1 . . . , T, (11)
j=1
z kt ≥ 0, k = 1 . . . , p, t = 1 . . . , T, (12)
I jt ≥ 0, j = 1 . . . , n, t = 1 . . . , T, (13)
y jkt ≥ 0, j = 1 . . . , n, k = 1 . . . , p, t = 1 . . . , T, (14)

The objective (8) is a function of the first-stage decision variable x and a realisation of the random vectors θ̃ and d̃. We
see from (8) that this cost includes the holding cost, the stockout cost, and the shipping cost from the warehouses to the
customers. Constraint (9) requires that the warehouse capacity cannot not be exceeded. Constraint (10) enforce that at each
warehouse j and at each period of time t, there is a flow conservation. Finally, (11) requires that for each customer and at
each period of time, the sum of the total supply and the amount of stockout is equal to the demand.
Remark 1 Given that it may be possible that for realisations of the uncertain demand parameters, the inventory capacity
at a warehouse may be violated. This situation will occur if the realised demand for a warehouse at some period is very
low and thus the inventory at the end of this period will be very high. We may accommodate this situation by including an
additional cost term to penalise excess warehouse capacity.

4. A simulation-optimisation solution approach

4.1 The hedging strategy
The exact solution of large-scale instances of the proposed mixed-integer stochastic program is a tedious task. In this section,
we describe an approximate solution strategy that requires solving a sequence of deterministic problems while properly
accommodating all the uncertain features of the problem. To that aim, we introduce an additional decision variable δ jt that
represents a hedging amount that is ordered by warehouse j in period t. This amount could be either positive or negative.
A positive amount indicates that the amount that is ordered by warehouse j from the plants should be inflated. Hence, this
additional order aims at preventing customers from experiencing stockouts. By contrast, a negative hedging amount aims at
hedging against high inventory costs.
Define u it as the amount of unused capacity of plant i in period T (i = 1 . . . , n, t = 1 . . . , T ). Given, a hedging vector
δ, we determine a feasible approximate solution of the first-stage problem (1)–(8) by solving the following (deterministic)
 International Journal of Production Research 1851

mixed-integer program:


m 
Ri 
n 
L 
m 
T 
m 
n 
T
Minimize f ir vir + g jl w jl + λi u it + (1 − E[θ̃it ])c̄i j xi jt
i=1 r =1 j=1 l=1 i=1 t=1 i=1 j=1 t=1

n 
T 
p 
T 
n 
p 
T
+ h j I jt + πk z kt + c jk y jkt (15)
j=1 t=1 k=1 t=1 j=1 k=1 t=1

subject to:


Ri
vir ≤ 1, i = 1 . . . , m, (16)
r =1
L
w jl ≤ 1, j = 1 . . . , n, (17)
l=1
n 
Ri
u it + xi jt = Q ir vir , i = 1 . . . , m, t = 1 . . . , T, (18)
j=1 r =1

m 
L
I j,t−1 + xi jt ≤ K jl w jl , j = 1 . . . , n, t = 1 . . . , T, (19)
i=1 l=1

p 
m
y jkt + I jt + δ jt = I j,t−1 + (1 − E[θ̃it ])xi jt , j = 1 . . . , n, t = 1 . . . , T, (20)
k=1 i=1

n
y jkt + z kt = E[d̃kt ], k = 1 . . . , p, t = 1 . . . , T, (21)
j=1
vir ∈ {0, 1}, i = 1 . . . , m, r = 1 . . . , Ri , (22)
wir ∈ {0, 1}, j = 1 . . . , n, l = 1 . . . , L , (23)
u it ≥ 0, i = 1 . . . , m, t = 1 . . . , T, (24)
z kt ≥ 0, k = 1 . . . , p, t = 1 . . . , T, (25)
I jt ≥ 0, j = 1 . . . , n, t = 1 . . . , T, (26)
xi jt ≥ 0, i = 1 . . . , m, j = 1 . . . , n, t = 1 . . . , T, (27)
y jkt ≥ 0, j = 1 . . . , n, k = 1 . . . , p, t = 1 . . . , T, (28)

Clearly, Model (15)–(28) can be viewed as a deterministic variant of Model (1)–(8). The main difference is that the
random variables were substituted with the corresponding mean variables. However, it is noteworthy, that (18) and (19)
implicitly assume a perfect yield. In so doing, the solution (that is, decision vector x) is guaranteed to be feasible with respect
to both the plant and the warehouse capacity constraints. Furthermore, an important difference is that the hedging amounts
are explicitly included in (20).
Given a hedging vector δ, Model (15)–(28) can be solved using a general-purpose solver. We denote by S(δ) = (v, w, x)
the derived solution. Note that S(δ) is also a feasible first-stage solution of the stochastic model (1)–(8). To compute an
estimate of the first-stage and second-stage costs, we fix variables v, w, and x and we use the following procedure to
compute an estimate of the corresponding expected total cost (including both first- and second-stage costs):

4.1.1 Monte Carlo procedure

(1) Step 0 – Set s = 1. Repeat Steps 1–5 r ep times (r ep is the number of replicates that is used to get an estimate of the
mean cost)
 θ̃ and d̃
(2) Step 1 – Randomly generate a realisation (or a scenario) of the uncertain vectors s s
m T  
(3) Step 2 – Compute the cost of unused plant capacities U = i=1 t=1 λi
s Ri
Q v − 1 − θ̃ s n x
r =1 ir ir it j=1 i jt
m T s )n c̄ x
(4) Step 3 – Compute the cost of production and delivery to the warehouses P s = i=1 t=1 (1 − θ̃it j=1 i j i jt
1852 R.W. Salem and M. Haouari

(5) Step 4 – For each period of time t (t = 1, . . . , T ) solve the following transportation problem:

p 
n 
p
st = Min πk z kt + c jk y jkt + h j I jt
k=1 j=1 k=1

subject to:

p m
 
y jkt + I jt = I j,t−1 + 1 − θ̃its xi jt , j = 1 . . . , n, (29)
k=1 i=1

n
y jkt + z kt = d̃kt
s
, k = 1 . . . , n, (30)
j=1
y jkt ≥ 0, j = 1 . . . , n, k = 1 . . . , p, (31)
I jt ≥ 0, j = 1 . . . , n, (32)
z kt ≥ 0, k = 1 . . . , p. (33)
T
(6) Step 5 – Compute the second stage cost s = t=1 st
m Ri n L r ep
(7) Step 6 – Compute an estimate of the mean total cost (δ) = i=1 r =1 f ir vir + j=1 l=1 g jl w jl + 1
r ep s=1
(U s + P s + s )
Since the solution (and therefore its expected cost) depends on the value that is assigned to the hedging vector δ, we
restate the SCND problem as the problem of finding an optimal hedging vector that achieves a minimal expect cost. That is,
the genuine problem is reformulated as the following optimal hedging problem:
Find δ ∗ = arg min δ∈[δmin ,δmax ] (δ) (34)
where δmin and δmax represent lower and upper bounds on the hedging values, respectively.

4.2 A particle swarm approach for solving the optimal hedging problem
The optimal hedging problem that is defined by (34) is a global optimisation problem. The fact that (.) can only be evaluated
through simulation makes this problem particularly challenging. We propose to derive a near-optimal solution using the PSO
approach (Kennedy 2010). Towards this end, we implemented a standard version of this algorithm. The main steps of this
approach are overviewed below (Eberhart and Shi 2001):
(1) Let N P S be the number of particles in the swarm. Initialise a population of N P S particles with random positions
and velocities. Particles are drawn from a uniform distribution throughout the search space. Provided that δmin and
δmax are minimum and maximum values of all particles (the particular setting of these parameters shall be specified
in Section 5.3), an initial position of particle δ q (q = 1, . . . , N P S) is given as follows (Talukder 2011):
q
δ jt = δmin, jt + ψ(δmax, jt − δmin, jt ), j = 1 . . . , n, t = 1 . . . , T, (35)
where ψ ∼ U [0, 1].
(2) For each particle δ q , evaluate the optimisation fitness value. This requires successively computing S(δ q ) through
solving Model (15)–(28) and computing (δ q ) using the Monte Carlo procedure.
(3) Compare particle’s fitness value (δ q ) with the fitness of the particle’s best known position π q . If (δ q ) < (π q ),
then update the particle’s best known position π q ← δ q .
(4) Compare particle’s fitness value (δ q ) with the fitness of the swarm’s best known position g. If (δ q ) < (g) then
update the swarm’s best known position g ← δ q .
(5) Update velocity v q and position of the particle δ q according to Equations (36) and (37)
v q ← ωv q + c1rand()(π q − δ q ) + c2 Rand()(g − δ q ) (36)
δ ←δ +v
q q q
(37)
where ω is the so-called inertia weight, c1 and c2 are two positive parameters, and rand() and Rand() are two random
numbers drawn from U [0, 1].
(6) Loop until a maximum number of iterations is reached.
 International Journal of Production Research 1853

Figure 1. Summarised solution approach for SCND problem.

4.3 Solution approach flow chart

Figure 1 shows a flow chart for the solution approach used for the studied problem. Particle swarm algorithm is used as an
optimiser to initiate solutions for the values of δ and to direct the search for global best solution. The MILP and the simulation
loop are embedded in the PSO loop. To determine the optimal hedging quantities, a simulation-optimisation approach is used.
The main components of this approach are: (i) a deterministic MILP that is solved iteratively, (ii) a Monte Carlo simulation
routine that provides estimates of the expected cost and (iii) a PSO procedure that aims at guiding the search process.

5. Computational experiments
5.1 Construction of the instance set
To illustrate our approach, we consider a network design problem that was introduced in Guillén et al. (2005). Briefly, the
supply chain includes three echelons consisting of plants, warehouses and demand nodes. The number of plants, warehouses
and customers are six, seven and eleven, respectively. In addition we have three different plants’ capacities and four different
warehouses’ capacities. So the problem not only considers the location of facilities, in addition, it considers sizing issues. The
objective is to obtain the optimal configuration of supply chain along with the material flows from the plants to warehouses
and from the warehouses to the customers with minimum expected cost. Moreover, since our model considers only one
product, Product 1 from the paper of Guillén et al. (2005) is considered only. Missing data are generated in consistency to
other available data.
Three levels were considered for supply uncertainty: high (H), medium (M) and low (L). Each level is characterised by: (i)
a specific uniform distribution of the probability Pi of failure of supplier i (i = 1, . . . , m), (ii) a specific uniform distribution
of the percentage i of delivered units in case of failure of supplier i (i = 1, . . . , m). That is, if supplier i receives in period
1854 R.W. Salem and M. Haouari

Table 1. Characteristics of supply based on level of randomness.

Level Supply uncertainty Pi (1 − 

θit )

1 Low U ∼ [0.1, 0.25] U ∼ [0.8, 0.9]

2 Med U ∼ [0.25, 0.40] U ∼ [0.7, 0.9]
3 High U ∼ [0.4, 0.6] U ∼ [0.6, 0.9]

Table 2. Characteristics of demand based on level of randomness.

Level Demand uncertainty CV

1 Low 0.05
2 Med 0.10
3 High 0.2

t an order of x units from a warehouse during a period of time, then the actual delivered quantity is i x with probability Pi ,
and x with probability 1 − Pi . The distributions of i and Pi for the different levels of uncertainty are provided in Table 1.
Also, three similar levels were considered for demand uncertainty. These levels are characterised by different coefficient
of variances (CV) (see Table 2).
In addition, we considered:
• Two demand patterns: steady and seasonal,
• Three different planning horizons: 4, 6 and 12 periods,
• Three PDFs of the demand: (1) Normal, (2) Log-normal and (3) Triangular. It is noteworthy, that for each preset CV
and each period of time, the three distributions exhibit the same means and variances.
By combining all problem characteristics, we obtained a total of 162 instances that were used for assessing the performance
of the proposed approach.

5.2 Length of simulation runs

We follow the procedure discussed in Law and Kelton (2000) for calculating the number of simulation runs. We found that
the minimum number of simulation iterations should be 75. In our experiments, the length of simulation runs was set to 100
iterations.

5.3 PSO parameters setting

The bounds on the hedging vector were empirically set as follows:

p
δmin, jt = −0.1 ȳ jkt , j = 1 . . . , n, t = 1 . . . , T, (38)
k=1

p
δmax, jt = 0.5 ȳ jkt , j = 1 . . . , n, t = 1 . . . , T, (39)
k=1

where ȳ jkt represents the quantity that is shipped from warehouse j to customer k in period t that is obtained upon solving
the deterministic version of the problem. This version is derived by setting all the stochastic parameters to their respective
mean values.
We found that the following parameters settings have achieved the highest reduction in the expected costs.
• Setting 1: N P S = 20, c1 = c2 = 2, ω: linearly decreasing from 1.4 to 0, number of iterations = 250.
• Setting 2: N P S = 20, c1 = 2, c2 = 1.05, ω: linearly decreasing from 1.3 to 0.3, number of iterations = 250
We note that the result presented in this paper is the best results obtained by either Setting 1 or Setting 2.
 International Journal of Production Research 1855

5.4 Upper and lower bounding procedures

To assess the performance of the proposed solution approach, we derived two bounding procedures where the former derives
a valid upper bound on the optimal solution and the latter a valid lower bounds. These procedures are detailed as follows.

5.4.1 Upper bound computation

A very simple (though naive) strategy to solve the stochastic problem requires solving the deterministic version that is
obtained by considering the mean values of the random parameters. This is precisely Model (15)–(28) with δ = 0. Next, an
estimate of the corresponding expected cost is computed using Monte Carlo simulation.

5.4.2 Lower bound computation

An alternative modelling of the investigated stochastic problem is through using a set
of discrete scenarios in which each
scenario is associated with a realisation of random parameters θ̃ and d̃. Let ξ ∈
be scenario and ξ(θ̃ ) and ξ(d̃) denote
the corresponding realisations. Let X = (v, w, x) denote the first-stage decision vector, z 1 (X ) the corresponding cost, and
z 2 (X, ξ ) the optimal value of the second-stage problem corresponding to the first-stage vector X and the parameters ξ(θ̃ ) and
ξ(d̃). Now, consider a sample
 ⊂
of S scenarios ξ1 , . . . , ξ S . Thus, given X the expected value of the second-stage cost
S
is approximated by the sample average function 1S s=1 z 2 (X, ξ s ). The sample average approximation (S A A) problem is
a deterministic mixed-integer program that is defined as follows:

1  2
S
z(
 ) = min (z 1 (X ) + z (X, ξ s )) (40)
X ∈P S
s=1

where P is the first-stage feasible polyhedron as implied by (2)–(8). Basically, S A A problem has a structure that is very
similar to Model (15)–(28) (with δ = 0). However, instead of considering mean values, we consider the S realisations of the
random parameters. Hence, each constraint in (15)–(28) that involves a random parameter is duplicated S times where each
one is associated with a different scenario, respectively.
To derive a point estimate of a lower bound on the optimal value z ∗ of the stochastic program, we implemented a sampling
strategy that was previously introduced by Mak, Morton, and Wood (1999). Towards this end, we generate N independent
samples
1 , . . . ,
N , each of size S, and we compute the corresponding values z(
1 ), . . . , z(
N ) through solving a sequence
of S A A problems. Mak, Morton, and Wood (1999) show that
⎛ ⎞
1 N
E⎝ z(
μ )⎠ ≤ z ∗ (41)
N
μ=1

Hence, a practical way for derive a valid lower bound is to solve a sequence of N S A A problems and deriving an estimate
of the mean optimal values. In our implementation, we set S = 10, and N = 100.

5.5 Computational results

The PSO algorithm and the Monte Carlo procedures were coded using Matlab R2010a. In addition, the mixed-integer
programs were solved using CPLEX 12.0. Namely we use CPLEX for Matlab and we call the function ‘cplexmilp’. All the
experiments were run on a PC equipped with a microprocessor Intel(R) Core(TM) i5-4200U CPU 1.6 GHz processor and a
4.00 GB of RAM.
Figure 2 shows the solution time given the number of periods. We see a significant increase in the solution time when
the number of period increases to 12 periods. However the solution times when T = 4, 6 are very much comparable.
In Tables 3 and 4, we report the percentage deviations between the values of the solutions that were derived using the
hedging strategy and the deterministic strategy for the cases of steady and seasonal demand, respectively. Tables 3 and 4
show that the hedging strategy outperforms the deterministic strategy both for the cases of steady and seasonal demand (with
a marginal better performance in this latter case), and that larger cost reductions are achieved in case of large number of
periods.
We observe that significant improvements are achieved for all the three probability distribution functions. However, we
see from Figure 3 that the log-normal distribution generally yields relatively inferior cost reduction.
1856 R.W. Salem and M. Haouari
2.8

2.6

2.4

(Solution time (hr))

2.2

1.8

1.6

1.4

Four Six Twelve

(Number of planning periods)

Figure 2. Solution time for different planning horizons.

Table 3. Results of the simulation-optimisation approach (percentage of cost reduction) for steady demand case.

Four Six Twelve

Scenario Log-normal Triangular Normal Log-normal Triangular Normal Log-normal Triangular Normal

H–H 40.59 40.20 42.92 47.97 50.91 50.49 54.58 58.23 59.10
H–M 39.67 40.60 40.60 47.45 48.77 49.76 55.63 57.56 57.05
H–L 39.34 39.32 40.12 47.47 48.18 48.46 54.94 55.43 55.23
M–H 24.71 34.63 35.47 32.62 40.97 40.72 38.36 48.62 49.18
M–M 23.71 27.02 26.86 31.44 36.901 36.22 39.97 42.17 42.67
M–L 25.82 25.33 24.78 30.99 34.01 34.57 39.70 40.06 40.25
L–H 9.58 25.41 24.78 15.07 31.93 32.45 18.83 39.19 39.69
L–M 9.25 15.59 16.38 14.21 23.42 24.49 18.41 27.21 28.76
L–L 8.79 13.90 13.92 14.53 17.24 18.98 18.19 23.35 23.93

Table 4. Results of the simulation-optimisation approach (percentage of cost reduction) for seasonal demand case.

Four Six Twelve

Scenario Log-normal Triangular Normal Log-normal Triangular Normal Log-normal Triangular Normal

H–H 41.28 44.40 46.16 47.25 50.14 50.58 53.71 57.79 57.36
H–M 42.15 43.05 42.79 46.51 49.02 49.17 53.64 54.66 56.65
H–L 41.52 42.68 43.10 47.25 48.14 47.94 54.28 54.35 54.57
M–H 26.19 36.73 36.22 31.41 42.13 41.08 37.35 47.09 48.52
M–M 26.27 28.33 30.35 32.26 34.79 38.18 38.19 39.27 38.25
M–L 25.90 28.89 28.09 31.15 34.09 34.94 38.19 39.27 38.25
L–H 9.40 26.80 27.27 15.60 31.81 31.96 17.27 39.92 37.97
L–M 9.18 18.79 17.45 15.14 24.07 23.88 17.17 27.73 26.95
L–L 9.30 14.20 14.44 15.01 19.48 19.58 16.26 22.56 22.11

Figures 4 and 5 plot the impact of supply uncertainty vs. demand uncertainty for steady demand and normal distribution.
Generally, we discovered that highest reduction in expected cost is obtained when supply is highly uncertain, regardless to
the level of demand uncertainty. And when the supply uncertainty is low, regardless to the demand uncertainty level, the
reduction in the expected cost is the lowest. From Figure 4, we observe that when demand uncertainty level is low, the
impact is noticeable over the different supply uncertainty levels while this impact is less when demand uncertainty is medium
or high. The same figure shows that when supply uncertainty is low, the impact of demand uncertainty level is noticeable
in comparison to the cases where supply uncertainty is medium or high. In other words, we observe that the impact of
 International Journal of Production Research 1857
55

(Reduction in expected cost (%))

Log−normal distribution
50 Triangular distribution
45 Normal distribution

40

35

30

25

20

15

10
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 Scenario 7 Scenario 8 Scenario 9

(Scenarios)

Figure 3. Percent reduction in cost and different types of demand distribution.

55

50

45
(Reduction in Cost(%))

40

35

30

25

20 Low supply uncertainty

Med supply uncertainty
High supply uncertainty
15
Low Med High

(Demand uncertainty)

Figure 4. Demand uncertainty impact (steady demand and normal distribution).

demand uncertainty is almost negligible when supply is highly uncertain. Figure 5 supports the observations from Figure 4.
In Figure 5, we observe having a sharp line for low-demand uncertainty which is translated to higher impact of demand when
its uncertainty is low over the different supply uncertainty levels. While the other lines are less sharper indicating less impact
on the solution. In Addition, the large gaps between the points when supply is low show that demand uncertainty variation
gives larger impact when compared to the gaps between the points when supply uncertainty is medium. The absence of gaps
between the points when supply is high show a dominant impact of high supply uncertainty.
Tables 5 and 6 display the percentage gaps between the values delivered by the hedging strategy and the lower bounds
that were computed using the scenario-based sampling strategy. We see form these tables that the largest achieved relative
gap is 7.2% (normal steady demand, six periods of time, high levels of randomness of both supply and demand), and the
smallest one is 0.24% (normal steady demand, six periods of time, low level supply randomness and medium level of demand
randomness).

5.6 Discussion
We found from the presented results that the hedging strategy consistently outperforms the deterministic strategies in all
cases since the percentage reduction reaches up to 59.10% in case of steady demand, normal distribution, 12 periods of time,
and when the levels of randomness are both high for the supply and for the demand. On the other hand, the smallest cost
1858 R.W. Salem and M. Haouari
55

50

45

(Reduction in Cost(%))
40

35

30

25

20 Low demand uncertainty

Med demand uncertainty
High demand uncertainty
15
Low Med High

(Supply uncertainty)

Figure 5. Supply uncertainty impact (steady demand and normal distribution).

Table 5. Results of the gaps between the objective of the solutions obtained by PSO and the value of the lower bounds % (steady demand).

Four Six Twelve

Scenario Log-normal Triangular Normal Log-normal Triangular Normal Log-normal Triangular Normal

H–H 5.87 4.98 5.22 7.16 6.40 7.20 5.92 6.21 6.10
H–M 5.87 5.04 4.78 7.14 4.76 6.78 5.32 4.83 4.77
H–L 5.87 4.94 4.51 7.15 6.82 6.91 5.32 5.59 6.54
M–H 2.77 3.08 1.45 3.49 3.19 5.11 2.87 4.74 3.66
M–M 2.77 3.13 3.02 3.42 2.09 2.66 2.85 5.26 3.77
M–L 2.76 2.88 2.65 3.42 2.18 2.78 2.85 4.70 3.32
L–H 1.54 0.78 1.43 1.50 1.95 1.65 1.88 3.29 2.92
L–M 1.54 0.37 0.44 2.03 1.43 0.24 1.93 3.24 1.42
L–L 1.54 0.85 0.60 1.51 1.85 0.97 1.76 2.15 1.00

Table 6. Results of the gaps between the objective of the solutions obtained by PSO and the value of the lower bounds % (seasonal
demand).

Four Six Twelve

Scenario Log-normal Triangular Normal Log-normal Triangular Normal Log-normal Triangular Normal

H–H 6.45 6.26 4.28 6.57 6.66 6.03 4.60 6.02 6.74
H–M 6.46 7.10 4.75 6.58 6.59 6.39 4.74 5.43 5.14
H–L 6.46 6.71 5.23 6.58 6.66 6.68 4.74 5.43 5.14
M–H 3.15 2.37 3.60 3.07 3.84 3.43 2.45 3.02 2.86
M–M 3.15 5.48 3.95 3.10 5.32 2.15 2.63 2.95 2.96
M–L 3.16 2.52 2.68 3.06 3.78 2.56 2.56 2.56 2.89
L–H 3.04 3.08 1.44 1.54 2.47 2.93 2.39 0.98 1.29
L–M 3.04 1.32 1.84 0.84 1.24 1.17 2.44 2.11 2.77
L–L 2.97 1.63 1.93 0.79 1.50 0.67 2.44 2.37 1.93
 International Journal of Production Research 1859

reduction was achieved in the case of steady demand, log-normal distribution, four periods of time, and when the levels of
randomness are both low for the supply and for the demand.
Longer planning horizons are associated with larger reduction in the expected costs for all scenarios in compare to
short and medium planning horizons. However, longer planning horizons are associated with longer solution times because
simulating for larger number of periods requires more time yet this increase is still acceptable and is found satisfactory when
considering a strategic, significant and complex problem like the one considered in this research.
No major difference of the results were obtained when testing different types of demand distributions. We tested three types
of demand distributions (i) Normal, (ii) log-normal, (iii) triangular. We found that both triangular and normal distributions
yield very much similar results, however, log-normal distribution yields smaller reductions in the expected cost for some
scenarios in compare to normal and triangular distribution.
The results of the various scenarios have shown that in general, supply uncertainty have more impact on the expected
cost reduction than demand uncertainty. We found that when the supply uncertainty is high, the demand uncertainty levels
(High–Med–Low) impact is negligible. In other words high supply uncertainty impact is dominant. However when supply
uncertainty is low, there is a noticeable impact of demand uncertainty levels (High–Med–Low). On the other hand, when
having low demand uncertainty, the impact of the different supply uncertainty level is more noticeable than when having
medium or high demand uncertainty. Finally, it is worth noting that when supply is highly uncertain, regardless to the level
of demand uncertainty, the reduction in the expected cost is highest and when the supply uncertainty is low, regardless to the
demand uncertainty level, the reduction in the expected cost is the lowest. So we can say that the high level of randomness
of the demand positively impact on the performance of the hedging strategy. Nevertheless, the presented result have shown
that the impact of the level of randomness of the supply is even more striking.
Regarding the quality of obtained PSO solutions, we observe that the values of the gaps mostly depend on the level of
supply randomness. Indeed, we see from Tables 5 and 6 that the higher is the level of randomness, the higher are the derived
gaps. Interestingly, we found that the gap is strictly inferior to 5% for 72.83% of the instances. These results provide empirical
evidence that the proposed hedging strategy delivers high-quality solutions.

6. Conclusion
In this paper, we addressed a stochastic network design problem with random supply and demand. To solve the problem, we
proposed a novel hedging strategy that amounts to restating the problem as finding optimal hedging amounts that minimise
the expected costs. This reformulated problem is a global optimisation problem that is solved approximately using a PSO
approach. The proposed hedging approach exhibits two main advantages: first, it is relatively simple since it requires solving
a sequence of deterministic problem (though fully capturing the intrinsic stochastic nature of the problem through embedding
a simulation routine). Second, it is flexible and can be easily tailored for a range of similar stochastic problems. We presented
the results of extensive computational experiments on a large set of instances and we found that the approach often delivers
high-quality solutions and therefore constitutes a viable solution strategy.
The last decade witnessed the development of numerous of metaheuristicss for continuous optimisation including
differential evolution, artificial bee colony, artificial immune system, virus optimisation, invasive weed optimisation, and
harmony search, to quote just a few. An interesting issue that is worthy of future research is to conduct a thorough comparison
of these approaches and identify the most effective approach for solving the hedging optimisation problem.
Also, a second issue that deserves further investigation, is to apply the hedging strategy for solving more complex
stochastic network design problems involving multiple periods, multiple products, random supply, demand, supply costs,
and lead times.

Disclosure statement
No potential conflict of interest was reported by the authors.

References

Amin, S. H., and G. Zhang. 2013. “A Multi-objective Facility Location Model for Closed-loop Supply Chain Network under Uncertain
Demand and Return.” Applied Mathematical Modelling 37 (6): 4165–4176.
Aydin, N., and A. Murat. 2013. “A Swarm Intelligence based Sample Average Approximation Algorithm for the Capacitated Reliable
Facility Location Problem.” International Journal of Production Economics 145 (1): 173–183.
Azaron, A., K. Brown, S. Tarim, and M. Modarres. 2008. “A Multi-objective Stochastic Programming Approach for Supply Chain Design
Considering Risk.” International Journal of Production Economics 116 (1): 129–138.
1860 R.W. Salem and M. Haouari

Benyoucef, L., X. Xie, and G. A. Tanonkou. 2013. “Supply Chain Network Design with Unreliable Suppliers: A Lagrangian Relaxation-
based Approach.” International Journal of Production Research 51 (21): 6435–6454.
Bouzembrak, Y., H. Allaoui, G. Goncalves, H. Bouchriha, and M. Baklouti. 2013. “A Possibilistic Linear Programming Model for Supply
Chain Network Design under Uncertainty.” IMA Journal of Management Mathematics 24 (2): 209–229.
Cardona-Valdés, Y., A. Álvarez, and D. Ozdemir. 2011. “A Bi-objective Supply Chain Design Problem with Uncertainty.” Transportation
Research Part C: Emerging Technologies 19 (5): 821–832.
Chen, C.-L., and W.-C. Lee. 2004. “Multi-objective Optimization of Multi-echelon Supply Chain Networks with Uncertain Product
Demands and Prices.” Computers & Chemical Engineering 28 (6): 1131–1144.
Chen, C.-L., T.-W. Yuan, and W.-C. Lee. 2007. “Multi-criteria Fuzzy Optimization for Locating Warehouses and Distribution Centers in
a Supply Chain Network.” Journal of the Chinese Institute of Chemical Engineers 38 (5): 393–407.
Chopra, S., and M. S. Sodhi. 2004. “Managing Risk To Avoid Supply-chain Breakdown.” MIT Sloan Management Review 46 (1): 53–61.
Davis, T. 1993. “Effective Supply Chain Management.” Sloan Management Review 34: 35–35.
Ding, H., L. Benyoucef, and X. Xie. 2006. “A Simulation-based Multi-objective Genetic Algorithm Approach for Networked Enterprises
Optimization.” Engineering Applications of Artificial Intelligence 19 (6): 609–623.
Eberhart, R. C., and Y. Shi. 2001. “Particle Swarm Optimization: Developments, Applications and Resources.” Vol. 1. Proceedings of the
2001 congress on evolutionary computation, Seoul, 2001; 81-86. IEEE.
Fallah-Tafti, A.I., R. Sahraeian, R. Tavakkoli-Moghaddam, and M. Moeinipour. 2014. “An Interactive Possibilistic Programming Approach
for a Multi-objective Closed-loop Supply Chain Network under Uncertainty.” International Journal of Systems Science 45 (3): 283–299.
Fazlollahtabar, H., I. Mahdavi, and A. Mohajeri. 2013. “Applying Fuzzy Mathematical Programming Approach to Optimize a Multiple
Supply Network in Uncertain Condition with Comparative Analysis.” Applied Soft Computing 13 (1): 550–562.
Guillén, G., F. Mele, M. Bagajewicz, A. Espuna, and L. Puigjaner. 2005. “Multiobjective Supply Chain Design under Uncertainty.”
Chemical Engineering Science 60 (6): 1535–1553.
Gupta, A., and C. D. Maranas. 2003. “Managing Demand Uncertainty in Supply Chain Planning.” Computers & Chemical Engineering
27 (8): 1219–1227.
Jindal, A., and K. S. Sangwan. 2014. “Closed Loop Supply Chain Network Design and Optimisation using Fuzzy Mixed Integer Linear
Programming Model.” International Journal of Production Research 52 (14): 4156–4173.
Jüttner, U. 2005. “Supply Chain Risk Management: Understanding the Business Requirements from a Practitioner Perspective.”
International Journal of Logistics Management 16 (1): 120–141.
Kadadevaramath, R. S., J. C. Chen, B. L. Shankar, and K. Rameshkumar. 2012. “Application of Particle Swarm Intelligence Algorithms
in Supply Chain Network Architecture Optimization.” Expert Systems with Applications 39 (11): 10160–10176.
Kaya, O., F. Bagci, and M. Turkay. 2014. “Planning of Capacity, Production and Inventory Decisions in a Generic Reverse Supply Chain
under Uncertain Demand and Returns.” International Journal of Production Research 52 (1): 270–282.
Kennedy, J. 2010. Particle Swarm Optimization. In Encyclopedia of Machine Learning, 760–766. New York: Springer.
Klibi, W., A. Martel, and A. Guitouni. 2010. “The Design of Robust Value-creating Supply Chain Networks: A Critical Review.” European
Journal of Operational Research 203 (2): 283–293.
Law, A. M., and W. D. Kelton. 2000. Simulation Modeling and Aanalysis. vol. 3. New York: McGraw-Hill.
Lee, D.-H., and M. Dong. 2009. “Dynamic Network Design for Reverse Logistics Operations under Uncertainty.” Transportation Research
Part E: Logistics and Transportation Review 45 (1): 61–71.
Lin, C.-C., and T.-H. Wang. 2011. “Build-to-order Supply Chain Network Design under Supply and Demand Uncertainties.” Transportation
Research Part B: Methodological 45 (8): 1162–1176.
Listeş, O. 2007. “A Generic Stochastic Model for Supply-and-return Network Design.” Computers & Operations Research 34 (2): 417–442.
Mak, W.-K., D. P. Morton, and R. K. Wood. 1999. “Monte Carlo Bounding Techniques for Determining Solution Quality in Stochastic
Programs.” Operations Research Letters 24 (1): 47–56.
Manuj, I., and J. T. Mentzer. 2008. “Global Supply Chain Risk Management.” Journal of Business Logistics 29 (1): 133–155.
Melo, M. T., S. Nickel, and F. Saldanha-Da-Gama. 2009. “Facility Location and Supply Chain Management-A Review.” European Journal
of Operational Research 196 (2): 401–412.
Miller, K. D. 1992. “A Framework for Integrated Risk Management in International Business.” Journal of International Business Studies
23 (2): 311–331.
Mudchanatongsuk, S., F. Ordóñez, and J. Liu. 2008. “Robust Solutions for Network Design under Transportation Cost and Demand
Uncertainty.” Journal of the Operational Research Society 59 (5): 652–662.
Nickel, S., F. Saldanha-da Gama, and H.-P. Ziegler. 2012. “A Multi-stage Stochastic Supply Network Design Problem with Financial
Decisions and Risk Management.” Omega 40 (5): 511–524.
Owen, S. H., and M. S. Daskin. 1998. “Strategic Facility Location: A Review.” European Journal of Operational Research 111 (3):
423–447.
Pan, F., and R. Nagi. 2010. “Robust Supply Chain Design under Uncertain Demand in Agile Manufacturing.” Computers & Operations
Research 37 (4): 668–683.
Persson, F., and J. Olhager. 2002. “Performance Simulation of Supply Chain Designs.” International Journal of Production Economics
77 (3): 231–245.
Pishvaee, M. S., F. Jolai, and J. Razmi. 2009. “A Stochastic Optimization Model for Integrated Forward/Reverse Logistics Network
Design.” Journal of Manufacturing Systems 28 (4): 107–114.
 International Journal of Production Research 1861

Pishvaee, M. S., M. Rabbani, and S. A. Torabi. 2011. “A Robust Optimization Approach to Closed-loop Supply Chain Network Design
under Uncertainty.” Applied Mathematical Modelling 35 (2): 637–649.
Pishvaee, M. S., and J. Razmi. 2012. “Environmental Supply Chain Network Design using Multi-objective Fuzzy Mathematical
Programming.” Applied Mathematical Modelling 36 (8): 3433–3446.
Pishvaee, M., and S. Torabi. 2010. “A Possibilistic Programming Approach for Closed-loop Supply Chain Network Design under
Uncertainty.” Fuzzy Sets and Systems 161 (20): 2668–2683.
Ramezani, M., A. M. Kimiagari, B. Karimi, and T. H. Hejazi. 2014. “Closed-loop Supply Chain Network Design under a Fuzzy
Environment.” Knowledge-Based Systems 59: 108–120.
Rao, S., and T. J. Goldsby. 2009. “Supply Chain Risks: A Review and Typology.” International Journal of Logistics Management 20 (1):
97–123.
Reiner, G., and M. Trcka. 2004. “Customized Supply Chain Design: Problems and Alternatives for a Production Company in the Food
Industry. A Simulation Based Analysis.” International Journal of Production Economics 89 (2): 217–229.
Salema, M. I. G., A. P. Barbosa-Povoa, and A. Q. Novais. 2007. “An Optimization Model for the Design of a Capacitated Multi-product
Reverse Logistics Network with Uncertainty.” European Journal of Operational Research 179 (3): 1063–1077.
Santoso, T., S. Ahmed, M. Goetschalckx, and A. Shapiro. 2005. “A Stochastic Programming Approach for Supply Chain Network Design
under Uncertainty.” European Journal of Operational Research 167 (1): 96–115.
Schütz, P., A. Tomasgard, and S. Ahmed. 2009. “Supply Chain Design under Uncertainty using Sample Average Approximation and Dual
Decomposition.” European Journal of Operational Research 199 (2): 409–419.
Selim, H., and I. Ozkarahan. 2008. “A Supply Chain Distribution Network Design Model: An Interactive Fuzzy Goal Programming-based
Solution Approach.” The International Journal of Advanced Manufacturing Technology 36 (3–4): 401–418.
Singh,A. R., P. Mishra, R. Jain, and M. Khurana. 2012. “Design of Global Supply Chain Network with Operational Risks.” The International
Journal of Advanced Manufacturing Technology 60 (1–4): 273–290.
Snyder, L. V. 2006. “Facility Location under Uncertainty: A Review.” IIE Transactions 38 (7): 547–564.
Tabrizi, B. H., and J. Razmi. 2013. “Introducing a Mixed-integer Non-linear Fuzzy Model for Risk Management in Designing Supply
Chain Networks.” Journal of Manufacturing Systems 32 (2): 295–307.
Talukder, S. 2011. Mathematical Modelling and Applications of Particle Swarm Optimization. Blekinge: School of Engineering at Blekinge
Institute of Technology.
Tang, C. S. 2006. “Perspectives in Supply Chain Risk Management.” International Journal of Production Economics 103 (2): 451–488.
Truong, T. H., and F. Azadivar. 2003. "Simulation Optimization in Manufacturing Analysis: Simulation based Optimization for Supply
Chain Configuration Design." Proceedings of the 35th conference on Winter Simulation: Driving Innovation. 1268-1275, New Orleans,
LA: Winter Simulation Conference.
Vahdani, B., R. Tavakkoli-Moghaddam, F. Jolai, and A. Baboli. 2013. “Reliable Design of a Closed Loop Supply Chain Network under
Uncertainty: An Interval Fuzzy Possibilistic Chance-constrained Model.” Engineering Optimization 45 (6): 745–765.
Van der Vorst, J. G., and A. J. Beulens. 2002. “Identifying Sources of Uncertainty to Generate Supply Chain Redesign Strategies.”
International Journal of Physical Distribution & Logistics Management 32 (6): 409–430.
Van der Vorst, J. G., A. J. Beulens, and P. van Beek. 2000. “Modelling and Simulating Multi-echelon Food Systems.” European Journal
of Operational Research 122 (2): 354–366.
Vos, B., and H. Akkermans. 1996. “Capturing the Dynamics of Facility Allocation.” International Journal of Operations & Production
Management 16 (11): 57–70.
Wikner, J., D. R. Towill, and M. Naim. 1991. “Smoothing Supply Chain Dynamics.” International Journal of Production Economics 22
(3): 231–248.
Xu, J., Y. He, and M. Gen. 2009. “A Class of Random Fuzzy Programming and its Application to Supply Chain Design.” Computers &
Industrial Engineering 56 (3): 937–950.
Yoo, T., H. Cho, and E. Yücesan. 2010. “Hybrid Algorithm for Discrete Event Simulation based Supply Chain Optimization.” Expert
Systems with Applications 37 (3): 2354–2361.
Zeballos, L. J., C. A. Méndez, A. P. Barbosa-Povoa, and A. Q. Novais. 2014. "Multi-period Design and Planning of Closed-loop Supply
Chains with Uncertain Supply and Demand." Computers & Chemical Engineering 66: 151–164.
Copyright of International Journal of Production Research is the property of Taylor & Francis
Ltd and its content may not be copied or emailed to multiple sites or posted to a listserv
without the copyright holder's express written permission. However, users may print,
download, or email articles for individual use.