The Retail Planning Problem Under Demand Uncertainty

We consider the Retail Planning Problem in which the retailer chooses suppliers, and determines the production, distribution and inventory planning for products with uncertain demand in order to minimize total expected costs. This problem is often faced by large retail chains that carry private label products. We formulate this problem as a convex mixed integer program and show that it is strongly NP-hard. We determine a lower bound by applying a Lagrangean relaxation and show that this bound outperforms the standard convex programming relaxation, while being computationally efficient. We also establish a worst-case error bound for the Lagrangean relaxation. We then develop heuristics to generate feasible solutions. Our computational results indicate that our convex programming heuristic yields feasible solutions that are close to optimal with an average suboptimality gap at 3.4%. We also develop managerial insights for practitioners who choose suppliers, and make production, distribution and inventory decisions in the supply chain.