Optimal allocation of stock levels and stochastic customer demands to a capacitated resource

This paper considers a class of stochastic resource allocation problems that requires simultaneously determining the customers that a capacitated resource must serve and the stock levels of multiple items that may be used in meeting these customers’ demands. Our model considers a reward (revenue) for serving each assigned customer, a variable cost for allocating each item to the resource, and a shortage cost for each unit of unsatisfied customer demand in a single-period context. The model maximizes the expected profit resulting from the assignment of customers and items to the resource while obeying the resource capacity constraint. We provide an exact solution method for this mixed integer nonlinear optimization problem using a Generalized Benders Decomposition approach. This decomposition approach uses Lagrangian relaxation to solve a constrained multi-item newsvendor subproblem and uses CPLEX to solve a mixed-integer linear Master Problem. We generate Benders cuts for the master problem by obtaining a series of subgradients of the subproblem’s convex objective function. In addition, we present a family of heuristic solution approaches and compare our methods with a commercial solver in order to benchmark their efficiency and quality.