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Appendix 4: Stochastic Programming > A4.2 Two-Stage Decisions with Uncertainty

A4.2. TWO-STAGE DECISIONS WITH UNCERTAINTY

In the one-stage model, a decision is made, and then the uncertain state is revealed. At that point, all conditions are determined, and the economic consequences can be computed. A more general structure is a two-stage model, which contains some opportunity to react to the uncertainty. The technical term for this structure is stochastic programming with recourse. Again, we illustrate the principles with a modification of Example A4.2.

EXAMPLE A4.2 General Appliance Company (continued)

Although monthly demand at GAC is uncertain, the uncertainty is resolved about half way through the month. At that point, it is still possible to alter production plans slightly. In particular, GAC can reschedule during the last week of the month, enough to raise the available hours in each department by 12 percent. Now, the Operations Manager faces a decision involving possible rescheduling as well as determining the output mix.


  

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