Using Neural Networks to Guide Data-Driven Operational Decisions

52 Pages Posted: 26 Sep 2022 Last revised: 3 Jan 2024

See all articles by Ningyuan Chen

Ningyuan Chen

University of Toronto - Rotman School of Management

Saman Lagzi

UNC - Kenan-Flagler Business School

Joseph Milner

University of Toronto - Rotman School of Management

Date Written: September 12, 2022

Abstract

We propose to use Deep Neural Networks to solve data-driven stochastic optimization problems. Given the historical data of the observed covariate, taken decision, and the realized cost in past periods, we train a neural network to predict the objective value as a function of the decision and the covariate. Once trained, for a given covariate, we optimize the neural network over the decision variable using gradient-based methods with the analytically-computed gradient and Hessian matrix. We characterize the performance of our methodology based on the generalization bound of the neural network. We conduct comprehensive experiments on three signature problems in operations management: the newsvendor problem, the multi-product pricing problem, and the call center staffing problem. Comparing our framework to existing approaches including conditional stochastic optimization and analytical approximations, we demonstrate the strength of our method when the objective function is unknown, with moderate size data, and when the structure of the problem cannot be approximated by simple or parametric forms.

Keywords: Deep Neural Networks, data-driven, newsvendor problem, product pricing, staffing

Suggested Citation

Chen, Ningyuan and Lagzi, Saman and Milner, Joseph, Using Neural Networks to Guide Data-Driven Operational Decisions (September 12, 2022). Available at SSRN: https://ssrn.com/abstract=4217092 or http://dx.doi.org/10.2139/ssrn.4217092

Ningyuan Chen

University of Toronto - Rotman School of Management ( email )

Saman Lagzi (Contact Author)

UNC - Kenan-Flagler Business School ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://samanlagzi.com

Joseph Milner

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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