Capacity Planning

under Uncertainty
CHE: 5480
Economic Decision Making in the Process Industry
Prof. Miguel Bagajewicz
University of Oklahoma
School of Chemical Engineering and Material Science

Characteristics of Two-Stage
Stochastic Optimization Models
Philosophy
Maximize the Expected Value of the objective over all possible realizations of
uncertain parameters.
Typically, the objective is Profit or Net Present Value.
Sometimes the minimization of Cost is considered as objective.

Uncertainty
Typically, the uncertain parameters are: market demands, availabilities,
prices, process yields, rate of interest, inflation, etc.
In Two-Stage Programming, uncertainty is modeled through a finite number
of independent Scenarios.
Scenarios are typically formed by random samples taken from the probability
distributions of the uncertain parameters.

Characteristics of Two-Stage
Stochastic Optimization Models
First-Stage Decisions
Taken before the uncertainty is revealed. They usually correspond to structural
decisions (not operational).
Also called Here and Now decisions.
Represented by Design Variables.
Examples:
To build a plant or not. How much capacity should be added, etc.
To place an order now.
To sign contracts or buy options.
To pick a reactor volume, to pick a certain number of trays and size
the condenser and the reboiler of a column, etc

Characteristics of Two-Stage
Stochastic Optimization Models
Second-Stage Decisions
Taken in order to adapt the plan or design to the uncertain parameters
realization.
Also called Recourse decisions.
Represented by Control Variables.
Example: the operating level; the production slate of a plant.
Sometimes first stage decisions can be treated as second stage decisions.
In such case the problem is called a multiple stage problem.

Two-Stage Stochastic Formulation

Let us leave it linear
because as is it is
complex enough.!!!

LINEAR MODEL SP

Max ps qsT ys cT x
s

Technology matrix

s.t.

First-Stage
Cost

Ax
Ax b

First-Stage Constraints

Ts x Wy s hs

Second-Stage Constraints

x0
First stage variables

Recourse
Function

x X

Second Stage Variables

ys 0
Recourse matrix (Fixed Recourse)
Sometimes not fixed (Interest rates in Portfolio Optimization)

Complete recourse: the

recourse cost (or profit) for
every possible uncertainty
realization remains finite,
independently of the first-stage
decisions (x).

Relatively complete recourse:

the recourse cost (or profit) is
feasible for the set of feasible
first-stage decisions. This
condition means that for every
feasible first-stage decision,
there is a way of adapting the
plan to the realization of
uncertain parameters.

We also have found that one

can sacrifice efficiency for
certain scenarios to improve
risk management. We do not
know how to call this yet.

Process Planning Under Uncertainty

GIVEN:

Process Network

Forecasted Data

DETERMINE:

Set of Processes
Set of Chemicals

B
A

Demands & Availabilities

Costs & Prices
Capital Budget

Network Expansions

Timing
Sizing
Location

Production Levels

OBJECTIVES:

Maximize Expected Net Present Value

Minimize Financial Risk

Process Planning Under Uncertainty

Design Variables: to be decided before the uncertainty reveals
x

Yit , Eit , Qit

Y: Decision of building process i in period t

E: Capacity expansion of process i in period t
Q: Total capacity of process i in period t

Control Variables: selected after the uncertain parameters become known

ys

Sjlts , Pjlts , Wits

S: Sales of product j in market l at time t and scenario s

P: Purchase of raw mat. j in market l at time t and scenario s
W: Operating level of of process i in period t and scenario s

MODEL
LIMITS ON EXPANSION

Yit EitL Eit Yit EitL

i 1,, NP t 1,, NT

TOTAL CAPACITY IN
EACH PERIOD

Qit Qi ( t 1) Eit

i 1,, NP t 1,, NT

LIMIT ON THE NUMBER

OF EXPANSIONS
LIMIT ON THE CAPITAL
INVESTMENT

NT

Y
t 1

it

NP

i 1

it

NEXPi
Eit it Yit CI t

i 1
, , NP
t 1,, NT

Yit: An expansion of process I in period t takes place (Yit=1), does not take place (Yit=0)
Eit: Expansion of capacity of process i in period t.
Qit: Capacity of process i in period t.

I : Processes i,=1,,NP
J : Raw mat./Products, j=1,,NC
T: Time periods. T=1,,NT
L: Markets, l=1,..NM

NEXPt: maximum number of expansions in period t

it : Variable cost of expansion for process i in period t
it : Fixed cost of expansion for process i in period t
Lower and upper bounds on a process expansion in period t

MODEL
UTILIZED CAPACITY IS
LOWER THAN TOTAL
CAPACITY

i 1,, NP t 1,, NT
NM

MATERIAL BALANCE

P
l 1

jlts

NP

NM

NP

i 1

l 1

i 1

ijWits S jlts ijWits

i 1,, NP t 1,, NT

BOUNDS
NONNEGATIVITY
Yit 0,1

INTEGER
VARIABLES

Yit: An expansion of process I in period t takes place (Yit=1), does not take place (Yit=0)
Eit: Expansion of capacity of process i in period t.
Qit: Capacity of process i in period t.
Wit: Utilized capacity of process i in period t.
Pjlt : Amount of raw material/intermediate product j consumed from market l in period t
Sjlt : Amount of intermediate product/product j sold in market l in period t
I : Processes i,=1,,NP
J : Raw mat./Products, j=1,,NC
T: Time periods. T=1,,NT
L: Markets, l=1,..NM

Lower and upper bounds on availability of raw material j in market l in period t, scenario s
Lower and upper bounds on demand of product j in market l in period t, scenario s

MODEL
OBJECTIVE FUNCTION

DISCOUNTED REVENUES

INVESTMENT

Yit: An expansion of process I in period t takes place (Yit=1), does not take place (Yit=0)
Eit: Expansion of capacity of process i in period t.
Wit: Utilized capacity of process i in period t.
Pjlt : Amount of raw material/interm. product j consumed from market l in period t
Sjlt : Amount of intermediate product/product j sold in market l in period t
I : Processes i,=1,,NP
J : Raw mat./Products, j=1,,NC
T: Time periods. T=1,,NT
L: Markets, l=1,..NM

jlt : Sale price of product/intermediate product j in market l in period t

jlt : Cost of product/intermediate product j in market l in period t
it : Operating cost of process i in period t
it : Variable cost of expansion for process i in period t
it : Fixed cost of expansion for process i in period t
Lt : Discount factor for period t

10

Example
Uncertain Parameters: Demands, Availabilities, Sales Price, Purchase Price
Total of 400 Scenarios
Project Staged in 3 Time Periods of 2, 2.5, 3.5 years
Chemical 5

Chemical 1

Process 1

Process 2

Chemical 6

Process 5

Chemical 8

Chemical 2

Chemical 7

Process 3
Chemical 4

Chemical 3
Process 4

11

Example Solution with Max ENPV

Period 321
2 years
2.5
3.5
years

14.95 kton/yr
Chemical
5 55
Chemical
Chemical
5.27
4.71 kton/yr
kton/yr
29.49 kton/yr
Chemical
Chemical 11
44.44
kton/yr
5.27
4.71 kton/yr
kton/yr

19.60
41.75
kton/yr
43.77kton/yr
kton/yr

Chemical 6
29.49 kton/yr

10.23
kton/yr
10.23
80.77 kton/yr

Process
Process 33
Chemical
Chemical333
Chemical

Process 2

Process111
Process
Process

80.77 kton/yr
Chemical 2
29.49 kton/yr
Chemical
7
21.88kton/yr
kton/yr
20.87
19.60
Chemical7kton/yr
7
Chemical

22.73
22.73 kton/yr
kton/yr

Process 5
22.73
22.73 kton/yr
ton/yr

Chemical 8
21.88
20.87 kton/yr
kton/yr

Process 4
22.73 kton/yr

Chemical
Chemical44
21.88
20.87kton/yr
kton/yr

12

Example Solution with Min DRisk( =900)

Period 321
2 years
2.5
3.5
years
2.39 kton/yr
Chemical
5 5
Chemical

Chemical
Chemical 11
7.54 kton/yr
kton/yr
4.99

Process 11
Process
Chemical 1
10.85 kton/yr
kton/yr
10.85
5.59 kton/yr

Chemical 5
4.99 kton/yr
5.15 kton/yr
5.592kton/yr
Process
Process 1

Chemical 3
41.70
kton/yr3
Chemical
43.54 kton/yr

Process 3
22.37 kton/yr
22.37 kton/yr
Chemical 3
Process 4
19.30 kton/yr
Process 4
22.37 kton/yr
22.37 kton/yr

5.15 kton/yr
10.85 kton/yr

Chemical 2
10.85
kton/yr
5.15 kton/yr
20.85 kton/yr

Process 3

Chemical 6

Chemical
7
21.77 kton/yr
Chemical 7
Process 3
22.37 kton/yr

Chemical 7
Process
19.305 kton/yr

Chemical 8

Process 5
22.43 kton/yr

20.85
kton/yr
Chemical
8
21.77 kton/yr

22.77 ton/yr

Chemical 4
20.85
kton/yr
Chemical
4
21.77 kton/yr

13

Example Solution with Max ENPV

Risk
1.0

PP solution

0.9
0.8
0.7
0.6
0.5
0.4

E[NPV ] = 1140 M$

0.3
0.2
0.1
0.0
250

500

750

1000

1250

1500

1750

2000

2250

2500

2750

3000

3250

NPV (M$)

14