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Robust Multi-Item Newsboy Models With A Budget Constraint: George L. Vairaktarakis
Robust Multi-Item Newsboy Models With A Budget Constraint: George L. Vairaktarakis
Robust Multi-Item Newsboy Models With A Budget Constraint: George L. Vairaktarakis
G
(Q
G
, d
G
) the pro"t function for item i, for the order quantity Q
G
and demand d
G
.
The pro"t function for the ith item is given by
G
(Q
G
, d
G
)"
(r
G
!c
G
#l
G
)Q
G
!l
G
d
G
if Q
G
)d
G
,
(r
G
!s
G
)d
G
!(c
G
!s
G
)Q
G
if Q
G
*d
G
.
(1)
For a particular item, the classical newsboy approach identi"es the quantity Q, that maximizes the
expected pro"t (see [2]). This approach results in
F(Q,)"
r!c#l
r!s#l
,
where F( ) ) is the cumulative distribution function of the probability density function (p.d.f.) f ( ) ) of the
demand for that particular item. If the p.d.f. is uniformly distributed in ;[D
, DM], a straightforward
calculation shows that
Q,"
(c!s)D
#(r!c#l)DM
r!s#l
. (2)
For our robust formulations we need the following de"nitions. Let DQ(i) be the collection of all possible
demand realizations for item i, i"1, 2,
2
, n. Then, the solution to any of the multi-item problems that will
be stated below must be a n-tuple in DQ(1);DQ(2);2;DQ(n). For discrete demand scenarios we consider
three di!erent objective functions. Our "rst objective is called absolute robustness and it is formulated as
follows:
(AR) max
'/
2
/L '"
Q
''"
2
""
Q
'L'
min
'B
2
BL '"
Q
''"
2
""
Q
'L'
L
G
(Q
G
, d
G
)
s.t.
L
G
c
G
Q
G
)=,
(3)
where = is our budget constraint. The absolute robustness approach attempts to "nd a n-tuple of order
quantities that maximize the worst case pro"t over all possible demand realizations.
The second formulation is called robust deviation, and is given by
(DR) min
'/
2
/L '"
Q
''"
2
""
Q
'L'
max
'B
2
BL '"
Q
''"
2
""
Q
'L'
L
G
(
G
(d
G
, d
G
)!
G
(Q
G
, d
G
))
s.t.
L
G
c
G
Q
G
)=.
(4)
This formulation provides a solution that minimizes over all choices of order quantities the maximum pro"t
loss due to demand uncertainty. This is a minimax regret approach where the regret is captured by the
di!erence
G
(d
G
, d
G
)!
G
(Q
G
, d
G
); i.e. the pro"t that could be realized if there was no demand uncertainty (in
which case we would order Q
G
"d
G
), minus the pro"t made for the order quantity Q
G
.
PROECO 2170
216 G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226
The third robust formulation is called relative robustness and the corresponding formulation is given by
(RR) min
'/
2
/L '"
Q
''"
2
""
Q
'L'
max
'B
2
BL '"
Q
''"
2
""
Q
'L'
L
G
(d
G
, d
G
)!
G
(Q
G
, d
G
)
G
(d
G
, d
G
)
s.t.
L
G
c
G
Q
G
)=,
(5)
which minimizes the relative pro"t loss per unit of pro"t that could be made if there was no demand
uncertainty. Note that the relative pro"t loss measures the lost pro"t as a percentage of the pro"t that could
be made if we knew the actual demand.
In the rest of our analysis it will become clear that the three objectives result to very di!erent choices of
order quantities. Similar formulations can be written for the case of interval scenarios. The only di!erence in
modeling the continuous case, is that the discrete scenarios DQ(i) in models (3)}(5) are replaced by the interval
scenarios [D
G
, D
G
] where D
G
, D
G
are the lower and upper bounds for the possible demand realizations of item
i: 1)i)n.
As we will show, some of the above problems are related to the continuous knapsack problem (see [21]):
max
L
G
w
G
x
G
s.t.
L
G
c
G
x
G
)C
0)x
G
)1, i"1, 2,
2
, n.
This problem can be solved using a property established in [20] which can be stated formally as follows.
Suppose that the n items are ordered according to nonincreasing order of the ratio w
G
/c
G
(i.e. weight per unit
cost). Then, an optimal solution of the continuous knapsack is given by
E x
G
"1 for i"1, 2,
2
, s!1,
E x
G
"0 for i"s#1,
2
, n, and
E x
Q
"c /c
Q
,
where s is the critical item for which s"min+i: G
H
c
H
'C,, and c"C!Q
G
c
G
. To compute the above
solution in O(n) time (and thus avoiding the ordering of the n items) can be done by identifying the critical
item s using a procedure proposed in [22]. Then, each ratio w
G
/c
G
can be compared against w
Q
/c
Q
which
prompts the assignment of the appropriate value for x
G
. Hence, the continuous knapsack problem is solvable
in time linear in the number of variables.
The outline of the rest of the paper is as follows. In Section 3 we consider robust models for a single item. In
Section 4 we develop algorithms for the multi-item case with a budget constraint, in the presence of interval
demand uncertainty. The case where demand uncertainty is structured by use of discrete scenarios is
considered in Section 5. Mixed scenarios where uncertain demand is described by means of discrete scenarios
for some items and interval scenarios for others, are considered in Section 6. We close Section 7 with some
conclusions.
3. Single-item models
To facilitate the development of robust inventory models for the multi-item case, we "rst need to consider
the special case of a single item. For notational simplicity, in this section we will not use indices for the
PROECO 2170
G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226 217
Fig. 1. The order quantities for the absolute, deviation, and relative robust objectives.
variables de"ned in Section 2, e.g. Q
G
will be denoted by Q, etc. Below we obtain the robust order quantity for
each of our three objectives (disregarding the budget constraint).
3.1. Absolute robustness
By observing the pro"t function (Q, d), we have that
min
B'"
"
M
'
(Q, d)"
(r!c#l)Q!lDM if Q)Q^)DM,
(r!s)D
!(c!s)Q if Q*Q^*D
,
(6)
where Q^ is the absolute robust-order quantity. For every "xed Q3[D
#lDM
r!s#l
. (7)
Evidently, Q^ is a convex combination of D
.
3.2. Robust deviation
The deviation robust-order quantity is the solution of
min
/'"
"
M
'
max
B'"
"
M
'
((d, d)!(Q, d)).
The function f '(Q)"max
B'"
"
M
'
((Q, d)!(d, d)) is given by
f '(Q)"
(r!c#l)(DM!Q) if Q)Q',
(c!s)(Q!D
) if Q*Q'
and it is minimized at the intersection Q' of the two branches; that point is
Q'"
(c!s)D
#(r!c#l)DM
r!s#l
. (8)
PROECO 2170
218 G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226
Note that Q' is also a convex combination of D
, DM], coincides
with the optimal solution of the single-item newsboy model with uniformly distributed demand in [D
, DM].
3.3. Relative robustness
We have that
min
/'"
"
M
'
max
B'"
"
M
'
(d, d)!(Q, d)
(d, d)
" min
/'"
"
M
'
max
B'"
"
M
'
'PA>J'B'PA>J'/
'PA'B
if Q)d,
'AQ''/B'
'PA'B
if Q*d.
(9)
For "xed Q"Q
"
and d*Q
"
, the "rst branch of (9) is maximized for d"DM, and the second branch is
maximized for d"D
"
M
'
(d, d)!(Q, d)
(d, d)
"
'PA>J'"
M
'PA>J'/
'PA'"
M
if Q)Q",
'AQ'"
>'AQ'/
'PA'"
if Q*Q",
has the form depicted in Fig. 1b, and Q" is the solution of (Q, DM)/(DM, DM)"(Q, D
)/(D
, D
), i.e.,
Q""
(r!s#l)D
DM
(r!c#l)D
#(c!s)DM
. (10)
Q" does not follow a form similar to Q^ or Q". In fact, Q" is proportional to D
G
(Q
G
, d
G
) (11)
s.t.
L
G
c
G
Q
G
)=, (12)
Q
G
3[D
G
, D
G
]. (13)
The following observations can be made for model AR}IS.
PROECO 2170
G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226 219
Lemma 1. There exists an optimal solution +Q
G
,L
G
for AR}IS such that Q
G
3[D
G
, Q^
G
], where Q^
G
is the absolute
robust quantity ( 7) for item i.
The proofs of all results are included in the appendix.
In light of this lemma,
G
(Q
G
, d
G
) can be replaced in AR}IS by (r
G
!c
G
#l
G
)Q
G
!l
G
D
G
. Then, (11) can be
replaced by
max
/G '"
"
M
'
L
G
[(r
G
!c
G
#l
G
)Q
G
!l
G
D
G
]. (14)
The optimal solution of (14) maximizes the quantity
G
(r
G
!c
G
#l
G
)Q
G
and therefore AR}IS reduces to
a continuous knapsack problem. We assume that =(
G
c
G
Q^
G
otherwise the trivial solution
Q
G
"Q^
G
, 1)i)n, is optimal. Below we adapt the continuous knapsack procedure of Section 2, for the
formulation AR}IS; we refer to the resulting algorithm for interval demand scenarios, as AID.
4.2. Algorithm AID
1. Index the items so that w
/c
*w
`
/c
`
*2*w
`
/c
`
, where w
G
"r
G
!c
G
#l
G
.
2. If =*
G
c
G
Q^
G
, then Q
G
"Q^
G
, 1)i)n, is an optimal solution; Stop. Else, identify the critical item s such
that
s : "min
i:
G
H
c
G
(Q^
G
!D
G
)#
L
G
c
G
D
G
*=
.
3. Set Q
G
: "Q^
G
for i(s, Q
G
: "D
G
for i's and Q
Q
: "
=!
WGWLG$Q
c
G
Q
G
/c
G
.
The complexity of AID is O(n log n), due to the sorting at step 1. However, if the critical element s is
identi"ed "rst (as discussed in Section 2), the sorting can be avoided and the complexity can drop to O(n).
Consider now the deviation robust formulation for interval demand scenarios.
(DR}IS) min
/G
max
BG '"G "
M
G '
L
G
(
G
(d
G
, d
G
)!
G
(Q
G
, d
G
)) (15)
s.t. (12), (13).
Similar arguments as for AR}IS indicate that there exists an optimal solution for DR}IS where Q
G
)Q'
G
,
where Q'
G
is the deviation robust quantity given in (8) for item i. Also, (15) is equivalent to
min
/G '"
"
M
'
L
G
(r
G
!c
G
#l
G
)(D
G
!Q
G
),
which accepts the same solution as (14). Hence,
Theorem 1. An absolute robust solution +Q
G
,L
G
(that solves AR}IS) is also deviation robust (i.e., solves
DR}IS).
PROECO 2170
220 G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226
Finally, consider the relative robustness model with interval demand scenarios
(RR}IS) min
/G
max
BG '"G "
M
G '
L
G
(d
G
, d
G
)!
G
(Q
G
, d
G
)
G
(d
G
, d
G
)
s.t. (12), (13). (16)
Similar arguments show that AID optimally solves RR}IS if w
G
is replaced by w
G
: "(r
G
!c
G
#l
G
)/
((r
G
!c
G
)D
G
). Hence, the item ordering is in nonincreasing order of
E (r
G
!c
G
#l
G
)/c
G
for the absolute and deviation robust objectives, and
E 1/c
G
D
G
#l
G
/(c
G
(r
G
!c
G
)D
G
) for the relative robustness objective,
as can be seen by calculating the ratio w
G
/c
G
for each of the objectives. The absolute and deviation robust
objectives favor items with larger ratio of (pro"t#lost sales)/cost. On the other hand, RR}IS favors low-cost
items, whose maximum possible demand is low (due to the term c
G
D
G
in the denominator of w
G
/c
G
), and large
lost sales to pro"t ratio l
G
/(r
G
!c
G
). A typical example of such environment is a supermarket, where pro"ts are
of the order of 2%, the maximum daily volume for most items is low, and the lost sales costs are signi"cant,
since stocking out in a particular item may force the consumer to buy all groceries from a competitor.
Example. Consider the cost and demand parameters provided below for "ve di!erent items. By identifying
the nonincreasing order of the quantities (r
G
!c
G
#l
G
)/c
G
and 1/c
G
D
G
#l
G
/(c
G
(r
G
!c
G
)D
G
) we indicate in Table
1 which items appear to be given higher priority by each of the three objectives AR, DR and RR for absolute,
deviation and relative robustness, respectively.
This example indicates that item 2 receives top priority by all three objectives because it happens to result
to a high (pro"t#lost sales)/cost ratio, and at the same time low D
G
and large lost sales to pro"t ratio. Item
1 is favored by the RR objective while its priority is deemed low for the AR and DR objectives. Similar
conclusions can be made for the remaining items. As a result, for any budget level, and for every one of the
three objectives, our formulations result to ordering the maximum possible number of units starting with
high priority items and continuing on with items of lower priority.
5. Discrete demand scenarios
In this section we assume that for each item 1)i)n we are given a scenario DQ(i) of demand quantities
that may be realized. The number of likely demand outcomes is "DQ(i)". The formulation for the absolute
Table 1
Item r
G
, c
G
, l
G
D
G
, D
G
r
G
!c
G
#l
G
c
G
1
c
G
D
G
#
l
G
c
G
(r
G
!c
G
)D
G
Priority
AR, DR RR
1 5, 3, 10 1, 2 4 1 4 2
2 4, 1, 7 1, 3 10 1.11 1 1
3 15, 3, 2 2, 8 4.67 0.048 2 4
4 12, 3, 3 3, 10 4 0.044 3 5
5 6, 4, 1 1, 6 0.75 0.0625 5 3
PROECO 2170
G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226 221
robust objective is
(AR}DS) max
/G "
Q
'G'
min
BG "
Q
'G'
L
G
(Q
G
, d
G
)
s.t. (12). (17)
In the next section we show that AR}DS is NP-hard.
5.1. NP-hardness result
We will show that AR}DS is NP-hard using a reduction from a well known NP-hard problem; the
even}odd partition (see [23]).
Input: A collection of positive integers a
G
, 1)i)2n, such that
G
a
G
"A.
Output: `Yesa i! +a
G
,`L
G
can be partitioned into 2 disjoint sets A
, A
`
such that
?G I
a
G
"A/2 for k"1, 2
and precisely one of a
`G
, a
`G
belongs to A
, for 1)i)n.
Theorem 2. Problem AR}DS is NP-complete.
Similar arguments can be used to show the NP-hardness of the deviation and relative robustness
formulations for discrete demand scenarios. In what follows we present optimal solution procedures for these
formulations based on dynamic programming.
5.2. Solution procedures
In this section we present dynamic programming optimal algorithms for the case of discrete scenarios
and each of the three robust objectives. We "rst consider the absolute robust objective. We assume that the
lowest and highest demand realizations in DQ(i) are D
G
and D
G
, respectively. Then, the function f ^
G
(Q
G
)"
min
BG "
Q
'G'
G
(Q
G
, d
G
) is depicted in Fig. 2a.
Observe that Fig. 2a is a discrete version of Fig. 1a precisely because we deal with discrete demand values
d
G
3DQ(i) rather than interval scenarios d
G
3[D
G
, D
G
] as in Fig. 1a. Note that some of the order quantities in
Fig. 2. The undominated order quantities ; ^
G
and ; '
G
.
PROECO 2170
222 G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226
DQ(i) are redundant. In Fig. 2a, the redundant quantities are depicted by un"lled circles; and they are the
quantities that are greater than the quantity QM^
G
3DQ(i) that maximizes f ^
G
(Q
G
). All these redundant order
quantities have a smaller contribution to the objective function value even though they require a greater
expenditure. As a result, they should never be considered in an optimal solution. Hence,
f ^
G
(QM^
G
)*f ^
G
(q) q3DQ(i).
Then, the set ;^
G
of undominated-order quantities consists of those order quantities that are less than or
equal to QM^
G
; namely
;^
G
: "+q3DQ(i): q)QM^
G
,.
Intuitively, the absolute robust performance of the order quantities q3DQ(i)!;^
G
are dominated by the
performance of QM^
G
because f ^
G
(QM^
G
)*f ^
G
(q) and c
G
QM^
G
)c
G
q. Hence, in any optimal solution for AR}DS, only
the order quantities in ;^
G
need to be considered for item i. With these observations, AR}DS reduces to
max
/G 3
^
G
L
G
f ^
G
(Q
G
)
s.t. (12), (18)
which is an integer knapsack problem and can be solved via the following dynamic program:
De"ne F
G
(w) to be the maximum pro"t that can be incurred for items 1, 2,
2
, i, if G
H
c
H
Q
H
)w.
Boundary Condition: F
"
(
G
c
G
D
G
) : "
G
f ^
G
(D
G
). This condition captures the requirement that at least D
G
units
must be ordered for item i, 1)i)n.
Recurrence Relation: F
G
(w)"max
/G 3
^
G
F
G
(w!c
G
Q
G
).
Solution: F
"max
G AG "G WUW5
F
L
(w).
The state space of the above DP is O(n=) due to the n items and the =units of resource available. In each
iteration, the DP requires O(max
G
DQ(i)) e!ort. Let k : "max
G
DQ(i); the total e!ort required by DP is no more
than O(nk=).
The dynamic programs that solve the deviation and relative robustness formulations for discrete demand
scenarios are identical to the one presented above, except for the de"nition of the ;^
G
's. Fig. 2b depicts by
"lled circles the undominated order quantities for item i and the deviation robust objective. In general, for the
deviation robust objective the quantity QM'
G
and the set ;'
G
are de"ned by
f '
G
(QM'
G
))f '
G
(q) q3DQ(i) and ;'
G
: "+q3DQ(i): q)QM'
G
,.
The de"nitions of QM"
G
and ;"
G
are analogous.
6. Mixed demand scenarios
In this section we consider the most general case where some items are of continuous nature while others
are of discrete nature. We assume that the demand and order quantities for the former items can be described
by an interval scenario as in Section 4 while the latter items can be described by discrete scenarios; in both
cases we use the generic notation DQ
G
to denote that scenario. Without loss of generality we can assume that
the items are indexed so that all the items of continuous nature come "rst. Assuming that there are
m continuous items, they are followed by n!m items of discrete nature.
Let us "rst consider the absolute robust formulation AR where the demand scenarios are replaced by DQ
G
.
Let +Q
G
,L
G
be an optimal choice of order quantities for the AR formulation with mixed scenarios. Then, the
portion =
: "K
G
c
G
Q
G
of the budget is spent on items of continuous nature, and the portion
PROECO 2170
G.L. Vairaktarakis / Int. J. Production Economics 66 (2000) 213}226 223
=
`
)=!=
is spent on items of discrete nature. As seen in Sections 4 and 5, the following properties
should hold for an optimal solution for the case of AR with mixed scenarios:
(a) For every item i of discrete nature, Q
G
3;^
G
(or ;'
G
, ;"
G
depending on the objective).
(b) For every item i of continuous nature, Q
G
3[D
G
, Q^
G
] (or [D
G
, Q'
G
], [D
G
, Q"
G
] depending on the objective).
(c) AID optimally assigns the =
3[K
G
c
G
D
G
, K
G
c
G
D
G
]. The following algorithm provides the main steps of the
proposed procedure.
6.1. Algorithm MIXED
1. Let z
'
(=
) be the optimal objective value for the continuous items with a resource of =
units;
=
3[K
G
c
G
D
G
, K
G
c
G
D
G
].
2. Apply DP on the discrete items with a budget limit of =units.
3. Let Z(=
) : "z
'
(=
)#F
L
(=!=
); for all =
3[K
G
c
G
D
G
, K
G
c
G
D
G
].
4. Compute Z
"max
5 '
K
G AG "G
K
G AG "G '
Z(=
).
Step 1 of MIXED can be performed in O(n log n) time by "rst sorting the items in nonincreasing order of
w
G
/c
G
and then computing z
'
(=
): =
3[K
G
c
G
D
G
, K
G
c
G
D
G
] as a piecewise linear increasing function (see
[20]). Step 2 requires O(nk=) time, while steps 3 and 4 require no more than O(=) time. Hence, the overall
complexity of MIXED is O(nk=).
Minor adaptation of the above procedure produces an optimal solution to the mixed scenario version of
the formulations DR and RR. The only change that needs to be made is that step 4 should be replaced by
Z
"min
5'
K
GAG "G
K
GAG "G '
Z(=
G
(Q
G
, d
G
). For every item i, f ^
G
(Q
G
) is a piecewise linear concave
function maximized at Q
G
"Q^
G
(see (7)). For every 1)i)n and Q
G
3[Q^
G
, D
G
] we have that f ^
G
(Q
G
))f ^
G
(Q^
G
)
(due to optimality of Q^
G
) and c
G
Q
G
*c
G
Q^
G
. This means that by selecting a quantity Q
G
greater than the robust
quantity Q^
G
for item i, the objective of AR}IS does not improve and at the same time a greater portion of the
budget = is consumed. Hence, the optimal quantity Q
G
belongs in [D
G
, Q^
G
].
Proof of Theorem2. Given an instance +a
G
,`L
G
of even}odd partition, consider the n-item instance of AR}DS
with c
G
"1, s
G
"0, l
G
"2, r
G
"2a
`G
/(a
`G
), DQ(i)"+a
`G
, a
`G
, for 1)i)n, and ="A/2. To see that the
above values result in a well de"ned instance of AR}DS, note that !(c
G
!s
G
)"!1 is negative, and
r
G
!c
G
#l
G
"2a
`G
/(a
`G
)#1'0 which agree with the desired slopes of the lines in Fig. 1a for every item i.
For the above data, and according to (7) we have
Q^
G
"
2a
`G
a
`G
a
`G
#a
`G
,
however, Q^
G
, DQ(i) in general. To see that Q^
G
3[a
`G
, a
`G
] note that if k : "a
`G
and : "a
`G
!a
`G
, then
a
`G
"k)k
2(k#)
2k#
"
2k(k#)
2k#
"Q^
G
"
2k`
2k#
#
2k
2k#
)k#"a
`G
.
Let us denote f ^
G
(Q
G
)"min
BG "
Q
'G'
G
(Q
G
, d
G
). For the above instance we have f ^
G
(a
`G
)"(r
G
!c
G
#l
G
)a
`G
!l
G
a
`G
"a
`G
. Similarly, f ^
G
(a
`G
)"a
`G
. Hence, AR}DS becomes
max
/G
+
?`G?`G
,
L
G
Q
G
s.t.
L
G
Q
G
)
A
2
. (A.1)
Clearly, (A.1) has a solution with objective value A/2 if and only if there exists a solution to the even-odd
partition problem. This completes the proof of the theorem.
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