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Neural network and regression spline value function

approximations for stochastic dynamic programming

Cristiano Cervellera

a

, Aihong Wen

b

, Victoria C.P. Chen

b,∗,1

a

Institute of Intelligent Systems for Automation-ISSIA-CNR, National Research Council of Italy,

Via De Marini 6, 16149 Genova, Italy

b

Department of Industrial & Manufacturing Systems Engineering, The University of Texas at Arlington,

Campus Box 19017, Arlington, TX 76019-0017, USA

Available online 30 June 2005

Abstract

Dynamic programming is a multi-stage optimization method that is applicable to many problems in engineering.

A statistical perspective of value function approximation in high-dimensional, continuous-state stochastic dynamic

programming (SDP) was ﬁrst presented using orthogonal array (OA) experimental designs and multivariate adap-

tive regression splines (MARS). Given the popularity of artiﬁcial neural networks (ANNs) for high-dimensional

modeling in engineering, this paper presents an implementation of ANNs as an alternative to MARS. Comparisons

consider the differences in methodological objectives, computational complexity, model accuracy, and numerical

SDP solutions. Two applications are presented: a nine-dimensional inventory forecasting problem and an eight-

dimensional water reservoir problem. Both OAs and OA-based Latin hypercube experimental designs are explored,

and OA space-ﬁlling quality is considered.

᭧ 2005 Elsevier Ltd. All rights reserved.

Keywords: Design of experiments; Statistical modeling; Markov decision process; Orthogonal array; Latin hypercube;

Inventory forecasting; Water reservoir management

∗

Corresponding author. Tel.: +1 817 272 2342; fax: +1 817 272 3406.

E-mail addresses: cervellera@ge.issia.cnr.it (C.Cervellera), axw0932@omega.uta.edu (A.Wen),

vchen@uta.edu (V.C.P. Chen).

1

Supported by NSF Grants #INT 0098009 and #DMI 0100123 and a Technology for Sustainable Environment (TSE) grant

under the US Environmental Protection Agency’s Science to Achieve Results (STAR) program (Contract #R-82820701-0).

0305-0548/$ - see front matter ᭧ 2005 Elsevier Ltd. All rights reserved.

doi:10.1016/j.cor.2005.02.043

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 71

1. Introduction

The objective of dynamic programming (DP) is to minimize a “cost” subject to certain constraints over

several stages, where the relevant “cost” is deﬁned for a speciﬁc problem. For an inventory problem, the

“cost” is the actual cost involved in holding inventory, having to backorder items, etc., and the constraints

involve capacities for holding and ordering items. An equivalent objective is to maximize a “beneﬁt”,

such as the robustness of a wastewater treatment system against extreme conditions. The state variables

track the state of the systemas it moves through the stages, and a decision is made in each stage to achieve

the objective.

Recursive properties of the DP formulation permit a solution via the fundamental recurrence equation

[1]. In stochastic dynamic programming (SDP), uncertainty is modeled in the formof randomrealizations

of stochastic system variables, and the estimated expected “cost” (“beneﬁt”) is minimized (maximized).

In particular, Markov decision processes may be modeled by a SDP formulation through which the state

variables resulting fromeach decision comprise a Markov process. DP has been applied to many problems

in engineering, such as water resources, revenue management, pest control, and wastewater treatment.

For general background on DP, see Bellman [1], Puterman [2] and Bertsekas [3]. For some applications,

see Gal [4], Shoemaker [5], White [6,7], Foufoula-Georgiou and Kitanidis [8], Culver and Shoemaker

[9], Chen et al. [10], and Tsai et al. [11]. In high dimensions, traditional DP solution methods can become

computationally intractable and attempts have been made to reduce the computational burden [12–14].

For continuous-state SDP, the statistical perspective of Chen et al. [15] and Chen [16] enabled the ﬁrst

truly practical numerical solution approach for high dimensions. Their method utilized orthogonal array

(OA, [17]) experimental designs and multivariate adaptive regression splines (MARS, [18]). Although

MARS has been applied in several areas (e.g., [19–22]), artiﬁcial neural network (ANN) models are much

more prevalent in all areas of engineering (e.g., [23–30]). Given their popularity, an ANN-based SDP

solution method would be more accessible to engineers. In this paper, we present:

• The statistical modeling approach to solving continuous-state SDP.

• Implementation of ANN models in continuous-state SDP as an alternative to MARS.

• Implementation of OA-based Latin hypercube (OA–LH) designs [31] as an alternative to pure OAs.

• Consideration of the “space-ﬁlling” quality of generated experimental designs. The designs are in-

tended to distribute discretization points so that they “ﬁll” the state space; however, generated designs

of the same type do not necessarily have equivalent space-ﬁlling quality.

• Comparisons between ANN and MARS value function approximations, including methodological

perspectives, computational considerations, and numerical SDP solution quality on two applications.

The novelty of our study is to simultaneously consider how the SDP solution is affected by different

approximation methods and designs of different types and different space-ﬁlling qualities.

In the statistical perspective of continuous-state SDP, the two basic requirements are an experimental

design to discretize the continuous state space and a modeling method to approximate the value function

An appropriate design should have good space-ﬁlling quality, and an appropriate modeling method should

be ﬂexible in high dimensions, provide a smooth approximation, and be reasonably efﬁcient. A review

of several experimental designs and modeling methods is provided by Chen et al. [32] in the context of

computer experiments. Of the possible modeling choices given in this review paper, only MARS, neural

networks, and kriging satisfy the ﬁrst two criteria. Some preliminary exploration of the kriging model

72 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

yielded positive results on a ten-dimensional wastewater treatment application [33], but solving for the

maximum likelihood estimates of the kriging parameters continues to be a computational challenge. For

this application, kriging required 40 times more computational effort than MARS. In addition, kriging

software is even harder to obtain than MARS software, which is counter to our motivation to employ

ANNs.

Comparisons betweenMARSandANNs for empirical modelinghave beenconductedbyDeVeauxet al.

[34] and Pham and Peat [35], and in both studies MARS performed better overall. Although it is obvious

that ANN models can be employed to approximate functions, the existing literature does not provide

sufﬁcient studies to predict how they will compare to MARS in the SDP setting. In continuous-state SDP,

value functions are typically well-behaved (e.g., convex) and the SDP data involve little noise. Previous

comparisons involved statistical data with considerable noise. It is expected that ANNmodels will perform

better in low noise situations. However, ANN models can add extraneous curvature, a disadvantage

when a smooth convex approximation is desired. MARS, on the other hand, constructs a parsimonious

approximation, but its limited structure, although quite ﬂexible, could affect its approximation ability,

which would be most noticeable in low noise situations. Finally, computational speed is an important

aspect of SDP, and the ANN model ﬁtting process has a reputation of being slow.

Studies on different experimental designs for metamodeling have been conducted [36–38]. However,

none have considered OA–LH designs. Given the success of OA designs in continuous-state SDP, we

chose the OA–LH design as a variation that might work well with ANN models. Points of an OA design

are limited to a fairly sparse grid, while the OA–LH design allows points to move off the grid. The grid

restriction was convenient for the MARS structure, but provides no advantage for ANN models.

Section 2 describes SDP in the context of the two applications that are later used to test our methods.

The SDP statistical modeling approach is given in Section 3. Section 4 provides background on OA and

OA–LH designs. Section 5 describes ANNs, and Section 6 presents the comparisons between the ANNs

and MARS, including the implementation of OA–LH designs. Conclusions are presented in Section 7.

2. SDP applications

In continuous-state DP, the systemstate variables are continuous. Chen et al. [15] and Chen [16] solved

inventory forecasting test problems with four-, six-, and nine-state variables modeled over three stages.

Application to ten- and seven-dimensional water reservoir SDP problems appears in Baglietto et al. [39]

and Baglietto et al. [40], and application to a 20-dimensional wastewater treatment systemappears in Tsai

et al. [11]. Here, we consider the nine-dimensional inventory forecasting problem, which is known to

have signiﬁcant interaction effects between inventory levels and forecasts due to the capacity constraints,

and an eight-dimensional water reservoir problem, which has simpler structure and is more typical of

continuous-state SDP problems.

2.1. Inventory forecasting problem

For an inventory problem, the inventory levels are inherently discrete since items are counted, but the

range of inventory levels for an item is too large to be practical for a discrete DP solution. Thus, one can

relax the discreteness and use a continuous range of inventory levels. The inventory forecasting problem

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 73

uses forecasts of customer demand and a probability distribution on the forecasting updates to model the

demand more accurately than traditional inventory models (see [41]).

2.1.1. State and decision variables

The state variables for inventory forecasting consist of the inventory levels and demand forecasts for

each item. For our nine-dimensional problem, we have three items and two forecasts for each. Suppose

we are currently at the beginning of stage t. Let I

(i)

t

be the inventory level for item i at the beginning of

the current stage. Let D

(i)

(t,t )

be the forecast made at the beginning of the current stage for the demand of

item i occurring over the stage. Similarly, let D

(i)

(t,t +1)

be the forecast made at the beginning of the current

stage for the demand of item i occurring over the next stage (t +1). Then the state vector at the beginning

of stage t is

x

t

=

I

(1)

t

, I

(2)

t

, I

(3)

t

, D

(1)

(t,t )

, D

(2)

(t,t )

, D

(3)

(t,t )

, D

(1)

(t,t +1)

, D

(2)

(t,t +1)

, D

(3)

(t,t +1)

T

.

The decision variables control the order quantities. Let u

(i)

t

be the amount of item i ordered at the

beginning of stage t. Then the decision vector is u

t

=

u

(1)

t

, u

(2)

t

, u

(3)

t

T

, where u

(i)

t

is the amount of item

i ordered in stage t. For simplicity, it is assumed that orders arrive instantly.

2.1.2. Transition function

The transition function for stage t speciﬁes the new state vector to be x

t +1

=f

t

(x

t

, u

t

,

t

), where x

t

is

the state of the system(inventory levels and forecasts) at the beginning of stage t, u

t

is the amount ordered

in stage t, and

t

is the stochasticity associated with updates in the demand forecasts. The evolution of

these forecasts over time is modeled using the multiplicative Martingale model of forecast evolution, for

which the stochastic updates are applied multiplicatively and assumed to have a mean of one, so that the

sequence of future forecasts for stage t + k forms a martingale [42]. See Chen [16] for details on the

stochastic modeling.

2.1.3. Objectives and constraints

The constraints for inventory forecasting are placed on the amount ordered, in the form of capacity

constraints, and on the state variables, in the formof state space bounds. For this test problem, the capacity

constraints are chosen to be restrictive, forcing interactions between the state variables, but are otherwise

arbitrary. The bounds placed on the state variables in each stage are necessary to ensure accurate modeling

over the state space.

The objective function is a cost function involving inventory holding costs and backorder costs. The

typical V-shaped cost function common in inventory modeling is

c

v

(x

t

, u

t

) =

n

I

¸

i=1

h

i

[I

(i)

t +1

]

+

+ ¬

i

[−I

(i)

t +1

]

+

, (1)

where [q]

+

=max{0, q}, h

i

is the holding cost parameter for itemi, and ¬

i

is the backorder cost parameter

for item i. The smoothed version of Eq. (1), described in Chen [16], is employed here.

74 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

Fig. 1. Reservior network.

2.2. Water reservoir problem

Optimal operation of water reservoir networks has been studied extensively in the literature (e.g.,

Archibald et al. [43], Foufoula-Georgiou and Kitanidis [8], Gal [4], Lamond and Sobel [44], Turgeon

[45] and Yalpwotz [46] provides an excellent survey). The water reservoir network we consider consists

of four reservoirs (see Fig. 1 for the conﬁguration). In typical models, the inputs to the nodes are water

released from upstream reservoirs and stochastic inﬂows from external sources (e.g., rivers and rain),

while the outputs correspond to the amount of water to be released during a given time stage (e.g., a

month).

2.2.1. State and decision variables

Ina realistic representationof inﬂowdynamics, the amount of (random) water ﬂowingintothe reservoirs

from external sources during a given stage t depends on the amounts of past stages. In this paper, we

follow the realistic modeling of Gal [4] and use an autoregressive linear model of order one. Thus, the

ith component of the random vector

t

, representing the stochastic external ﬂow into reservoir i, has the

form

c

(i)

t

= a

(i)

t

c

(i)

t −1

+ b

(i)

t

+ c

(i)

t

.

(i)

t

, (2)

where

t

is a random correction that follows a standard normal distribution. The coefﬁcients of the

linear combinations (a

t

, b

t

, c

t

) actually depend on t, so that it is possible to model proper external inﬂow

behaviors for different months. The actual values of the coefﬁcients used for the model were based on

the one-reservoir real model described in Gal [4] and extended to our four-reservoir network.

Given Eq. (2), the state vector consists of the water level and stochastic external inﬂow for each

reservoir:

x

t

=

w

(1)

t

, w

(2)

t

, w

(3)

t

, w

(4)

t

, c

(1)

t

, c

(2)

t

, c

(3)

t

, c

(4)

t

T

,

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 75

where w

(i)

t

is the amount of water in reservoir i (i = 1, 2, 3, 4) at the beginning of stage t, and c

(i)

t

the

stochastic external inﬂowinto reservoir i during stage t. The decision vector is u

t

=

u

(1)

t

, u

(2)

t

, u

(3)

t

, u

(4)

t

T

,

where u

(i)

t

be the amount of water released from reservoir i during stage t.

2.2.2. Transition function

The transition function for stage t updates the water levels and external inﬂows. The amount of water

at stage t + 1 reﬂects the ﬂow balance between the water that enters (upstream releases and stochastic

external inﬂows) and the water that is released. In order to deal with unexpected peaks from stochastic

external inﬂows, each reservoir has a ﬂoodway, so that the amount of water never exceeds the maximum

value W

(i)

. Thus, the new water level is

w

(i)

t +1

= min

⎧

⎨

⎩

w

(i)

t

+

¸

j∈U

(i)

u

(j)

t

− u

(i)

t

+ c

(i)

t

, W

(i)

⎫

⎬

⎭

,

where U

(i)

the set of indexes corresponding to the reservoirs which release water into reservoir i. For the

stochastic external inﬂows, we can update them using Eq. (2). Like the inventory forecasting model, the

two equations above can be grouped in the compact transition function x

t +1

= f

t

(x

t

, u

t

,

t

).

2.2.3. Objectives and constraints

The constraints for water reservoir management are placed on the water releases u

(i)

t

in the form:

0u

(i)

t

min

⎧

⎨

⎩

w

(i)

t

+

¸

j∈U

i

u

(j)

t

, R

(i)

⎫

⎬

⎭

,

where R

(i)

the maximum pumpage capability for reservoir i. This implies nonnegativity of w

i

t +1

. The ob-

jective function is intended to maintain a reservoir’s water level close to a target value ˜ w

(i)

t

and maximize

beneﬁt represented by a concave function g of the water releases and/or water levels (e.g., power genera-

tion, irrigation, etc.). For maintaining targets, the intuitive cost would be |w

(i)

t

− ˜ w

(i)

t

|, which is aV-shaped

function. To facilitate numerical minimization, we utilized a smoothed version, denoted by l

w

(i)

t

, ˜ w

(i)

t

,

that is analogous to the smoothed cost function for the inventory forecasting problem. For the modeling

beneﬁts, we consider a nonlinear concave function g of the following form (for z ∈ [0, +∞)):

g(z, j, [) =

⎧

⎪

⎪

⎪

⎪

⎪

⎨

⎪

⎪

⎪

⎪

⎪

⎩

([ + 1)z, 0z

1

3

j,

[z +

1

2

j −

45

j

2

z −

2

3

j

3

−

153

2j

2

z −

2

3

j

4

,

1

3

jz

2

3

j,

[z +

1

2

j, z

2

3

j.

Such a function models a beneﬁt which becomes relevant for “large” values of the water releases, de-

pending on suitable parameters j and [. In our example, we used R

(i)

for j and a small number 0.1

76 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

for [. Then, the total cost function at stage t can be written as

c

t

(x

t

, u

t

,

t

) =

4

¸

i=1

l

w

(i)

t

, ˜ w

(i)

t

−

4

¸

i=1

p

(i)

g

u

(i)

t

, j

(i)

, [

,

where the p

(i)

, i = 1, 2, 3, 4 are weights chosen to balance the beneﬁts against the costs.

3. SDP statistical modeling solution approach

3.1. Future value function

For a given stage, the future value function provides the optimal cost to operate the system from stage t

through T as a function of the state vector x

t

. Following the notation in Section 2, this is written recursively

as

F

t

(x

t

) = min

u

t

E{c(x

t

, u

t

,

t

) + F

t +1

(x

t +1

)}

s.t. x

t +1

= f

t

(x

t

, u

t

,

t

),

(x

t

, u

t

) ∈ I

t

. (3)

If we have the future value functions for all the stages, then given the initial state of the system, we

can track the optimal solution through the value functions. Thus, given a ﬁnite time horizon T, the basic

SDP problem is to ﬁnd F

1

(·), . . . , F

T

(·). The recursive formulation permits the DP backward solution

algorithm [1], ﬁrst by assuming F

T +1

(x

T +1

) ≡ 0, so that F

T

(x

T

) =c

T

(x

T

) (where c

T

(x

T

) is the cost of

the ﬁnal stage depending only on x

T

), then solving in order for F

T

(·) through F

1

(·). See the description

in Chen [16] or Chen et al. [47] for further details.

3.2. Numerical solution algorithm

Given the state of the systemat the beginning of the current stage, the corresponding optimal cost yields

one point on that stage’s value function. The complete future value function is obtained by solving this

optimization problem for all possible beginning states. For continuous states, this is an inﬁnite process.

Thus, except in simple cases where an analytical solution is possible, a numerical SDP solution requires

a computationally tractable approximation method for the future value function.

Froma statistical perspective, let the state vector be the vector of predictor variables. We seek to estimate

the unknown relationship between the state vector and the future value function. Response observations

for the future value function may be collected via the minimization in Eq. (3). Thus, the basic procedure

uses an experimental design to choose Npoints in the n-dimensional state space so that one may accurately

approximate the future value function; then constructs an approximation.

Chen et al. [15] introduced this statistical perspective using strength three OAs and MARS (smoothed

with quintic functions) applied to the inventory forecasting test problems. MARS was chosen due to its

ease of implementation in high dimensions, ability to identify important interactions, and easy derivative

calculations. The choice of the strength three OAs was motivated by the desire to model interactions,

but univariate modeling can suffer due to the small number of distinct levels in each dimension (e.g.,

p = 13 was the highest number of levels explored). Chen [16] additionally explored strength two OAs

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 77

with equivalent N to the strength three OAs, but with lower order balance permitting higher p; however,

their performance was disappointing.

4. Discretizations based on OAs

In continuous-state SDP, the classical solution method discretizes the state space with a full grid,

then uses multi-linear interpolation to estimate the future value function. This full grid is equivalent to a

full factorial experimental design, for which the number of points grows exponentially as the dimension

increases. To avoid this, a fractional factorial design, i.e., taking a subset of the full grid, may be employed.

OAs are special forms of fractional factorial designs. Afull factorial design for n variables, each at p levels,

contains all p

n

level combinations. An OA of strength d (d <n) for n variables, each at p levels, contains

all possible level combinations in any subset of d dimensions, with the same frequency, z. Therefore, when

projected down onto any d dimensions, a full factorial grid of p

d

points replicated z times is represented.

4.1. Measuring space-ﬁlling quality

There are a variety of ways to generate OAs (e.g., [48–53]). However, there is no way to guarantee their

space-ﬁlling quality. In practice, one can generate many OAs, calculate various space-ﬁlling measures,

then choose the best of the bunch. Chen [17] has conducted the only study of how this quality affects an

approximation, and only OAs of strength three were studied.

Looking at the two conﬁgurations of points in Fig. 2, the one on the left is seen to space the points

better. There are two basic ways to measure space-ﬁlling quality: minimax and maximin (refer to [32]).

Let D be the n-dimensional closed and bounded set of the continuous state space, and P be the set of n

design points in D. Minimax criteria seek to minimize the maximumdistance between (nondesign) points

in D and the nearest-neighbor design point in P. Using the same distance measure as above, deﬁne:

MAXDIST(D, P) = sup

x∈D

¸

min

y∈P

d(x, y)

¸

.

Since the supremum over the inﬁnite set of points in D is difﬁcult to calculate, this measure is usually

calculated over a ﬁnite sample of points in D, using a full factorial grid or some type of sampling scheme.

However, this measure is generally impractical to calculate in high dimensions. A design that represents

D well will have lower MAXDIST(D, P) than a design that does not.

•

•

•

•

•

•

•

•

x

1

0 1 4

x

2

• •

0

2

4

1

3

x

1

0

2

4

1

3

2 3 0 1 4

x

2

2 3

Fig. 2. Two conﬁgurations of design points.

78 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

Maximin criteria seek to maximize the minimum distance between any pair of points in P. Let d(x, y)

be a distance measure (commonly Euclidean distance) over R. Then deﬁne:

MINDIST(P) = min

x∈P

⎧

⎨

⎩

min

y∈P

y=x

d(x, y)

⎫

⎬

⎭

.

Higher MINDIST(P) should correspond to a more uniform scattering of design points. For the OA

designs in this paper, their space-ﬁlling quality was judged using measures of both types and a measure

introduced by Chen [17].

4.2. OA-based LH designs

LH designs are equivalent to OA designs of strength one. In other words, if we project the N points

of a LH design onto any single dimension, the points will correspond to N distinct levels in that di-

mension. However, only OAs of strength two and higher are technically orthogonal, so the LH design

does not maintain this property. A hybrid OA–LH design, for which an LH design is (randomly) cre-

ated from an OA structure, was introduced by Tang [31] to address the lack of orthogonality in LH

designs. Although OA–LH designs only satisfy LH properties, the underlying OA provides some bal-

ance. With regard to approximating a function, the LH design provides more information along a single

dimension (for univariate terms), while the OA design provides better coverage in higher dimensions (for

interactions).

In this paper, we utilize the strength three OAs described in Chen [17], and the OA–LH designs are

based on these strength three OAs. Speciﬁcally, we employed strength three OAs with p = 11 levels

(N = 1331) and p = 13 levels (N = 2197) in each dimension, and two realizations of OA–LH designs

were generated for each OA. For each size (N = 1331 and 2197), one “good”, one “neutral”, and one

“poor” OA was selected based on space-ﬁlling measures described above. Thus, a total of 6 OAs and

12 OA–LH designs were tested. For the inventory forecasting problem, nine-dimensional designs were

generated, and for the water reservoir problem, eight-dimensional designs were generated.

5. Artiﬁcial neural networks

5.1. Model description

ANNs are mathematical modeling tools widely used in many different ﬁelds (for general background

and applications see Lippmann [54], Haykin [55], Bertsekas and Tsitsiklis [14], Cherkassky and Mulier

[56]; for statistical perspectives see White [57], Barron et al. [58], Ripley [59], or Cheng and Titterington

[60]; for approximation capabilities see Barron [61]). From a purely “analytical” perspective, an ANN

model is a nonlinear parameterized function that computes a mapping of n input variables into (typically)

one output variable, i.e., n predictors and one response. The basic architecture of ANNs is an interconnec-

tion of neural nodes that are organized in layers. The input layer consists of n nodes, one for each input

variable, and the output layer consists of one node for the output variable. In between there are hidden

layers which induce ﬂexibility into the modeling. Activation functions deﬁne transformations between

layers, the simplest one being a linear function. Connections between nodes can “feed back” to previous

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 79

layers, but for function approximation, the typical ANN is feedforward only with one hidden layer and

uses “sigmoidal” activation functions (monotonic and bounded). A comprehensive description of various

ANN forms may be found in [55].

In our inventory forecasting SDP application, we utilized a feedforward one-hidden-layer ANN

(FF1ANN) with a “hyperbolic tangent” activation function: Tanh(x) = (e

x

− e

−2x

)/(e

x

+ e

−x

). De-

ﬁne n as the number of input variables, H as the number of hidden nodes, v

jh

as weights linking input

nodes j to hidden nodes h, w

h

as weights linking hidden nodes h to the output node, and 0

h

and ¸ as

constant terms called “bias” nodes (like intercept terms). Then our ANN model form is

ˆ g(x; w, v, , ¸) = Tanh

H

¸

h=1

w

h

Z

h

+ ¸

,

where for each hidden node h

Z

h

= Tanh

n

¸

i=1

v

ih

x

i

+ 0

h

.

The parameters v

ih

, w

h

, 0

h

, and ¸ are estimated using a nonlinear least-squares approach called training.

For simplicity, we will refer to the entire vector of parameters as w in the following sections.

5.2. Model ﬁtting

Our training employed a batch processing method (as opposed to the more common on-line processing)

that minimized the squared error loss lack-of-ﬁt (LOF) criterion:

LOF( ˆ g) =

N

¸

j=1

[y

j

− ˆ g(x

j

, w)]

2

,

where N is the number of data points on which the network is being trained, a.k.a., the training data set.

Nonlinear optimization techniques used to conduct the minimization are typically gradient descent-based

methods. We used the backpropagation method (see [62,63]), which computes the gradient of the output

with respect to the outer parameters, then “backpropagates” the partial derivatives through the hidden

layers, in order to compute the gradient with respect to the entire set of parameters. This is completed in

two phases: (i) a forward phase in which an input x

j

is presented to the network in order to generate the

various outputs (i.e., the output of the network and those of the inner activation functions) corresponding

to the current value of the parameters, and (ii) a backward phase in which the gradient is actually computed

on the basis of the values obtained in the forward phase. After all N samples are presented to the network

and the corresponding gradients are computed, the descent algorithm step is completed by upgrading the

vector of parameters w using the steepest-descent method:

w

k+1

= w

k

− :

k

∇LOF(w

k

),

where ∇LOF(w

k

) is the gradient of the LOF function with respect to the vector w

k

. Implementation of

this approach is very simple, since the computation of the gradient requires only products, due to the

80 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

mathematical structure of the network. Unfortunately, backpropagation presents many well-known dis-

advantages, such as entrapment in local minima. As a consequence, the choice of the stepsize :

k

is crucial

for acceptable convergence, and very different stepsizes may be appropriate for different applications.

The best training algorithmfor FF1ANNs, in terms of rate of convergence, is the Levenberg–Marquardt

method (ﬁrst introduced in [64]), which is an approximation of the classic second-order (i.e., it makes

use of the Hessian matrix) Newton method. Since our LOF criterion is quadratic, we can approximate its

Hessian matrix via backpropagation as

J[e(w)]

T

J[e(w)],

where

e(w) = [y

1

− ˆ g(x

1

, w), . . . , y

N

− ˆ g(x

N

, w)]

T

and J[e(w)] is the Jacobian matrix of e(w). Each row of the matrix contains the gradient of the jth single

error term y

j

− ˆ g(x

j

, w) with respect to the set of parameters w.

The update rule for the parameter vector at each step is

w

k+1

= w

k

− [J[e(w

k

)]

T

J[e(w

k

)] + zI]

−1

J[e(w

k

)]

T

e(w

k

)

T

.

When z is large, the method is close to gradient descent with a small stepsize. When z = 0 we have a

standard Newton method with an approximated Hessian matrix (Gauss–Newton method), which is more

accurate near the minima. After each successful step (i.e., when the LOF decreases) z is decreased, while

it is increased when the step degrades the LOF.

5.3. Model implementation

Other than the selection of a model ﬁtting approach, the most important decision in implementing an

ANN model is the choice of architecture. For a FF1ANN, the number of nodes in the hidden layer, H,

determines the architecture. Unfortunately, the appropriate number of hidden nodes is never clear-cut.

Existing theoretical bounds on the accuracy of the approximation are non-constructive or too loose to

be useful in practice. Thus, it is not possible to deﬁne “a priori” the optimal number of hidden nodes,

since it depends on the number of samples available and on the smoothness of the function we want to

approximate. Too few nodes would result in a network with poor approximation properties, while too

many would “overﬁt” the training data (i.e., the network merely “memorizes” the data at the expense

of generalization capability). Therefore, a tradeoff between these two possibilities is needed. There are

many rules of thumb and methods for model selection and validation in the literature, as well as methods

to avoid or reduce overﬁtting (see [55]), but the choice of a good architecture requires several modeling

attempts and is always very dependent on the particular application.

For our applications, we identiﬁed the appropriate number of hidden nodes by exploring many ar-

chitectures and checking the average cost using a test data set from the simulation described in Section

6.2. The best results for the nine-dimensional inventory forecasting problem were obtained for values of

H = 40 for N = 1331 and H = 60 for N = 2197. Similarly, the best results for the eight-dimensional

water reservoir problem were obtained using H = 10 for both sample sizes. For larger values of H the

solutions worsened.

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 81

6. ANNs and MARS comparisons

ANNs have become very popular in many areas of science and engineering, due to their proven ability

to ﬁt any data set and to approximate any real function, together with the existence of accessible software,

such as Matlab’s (www.mathworks.com) Neural Network Toolbox, which was used in our study.

The primary disadvantages are (1) the difﬁculty in selecting the number of hidden nodes H and (2)

potential overﬁtting of the training data. The second disadvantage occurs because it is tempting to try

to ﬁt the data as closely as possible even when it is not appropriate. Both disadvantages can be handled

by proper use of a test data set, but this process greatly increases the computational effort required.

From a statistical perspective, ANNs have the additional disadvantage of an approximation that does not

provide interpretable information on the relationships between the input (predictor) variables and output

(response) variable.

MARS [18] is based on traditional statistical thinking with a forward stepwise algorithm to select

terms in a linear model followed by a backward procedure to prune the model. The approximation bends

to model curvature at “knot” locations, and one of the objectives of the forward stepwise algorithm

is to select appropriate knots. The search for new basis functions can be restricted to interactions of a

maximumorder. For the inventoryforecastingproblems, MARSwas restrictedtoexplore uptothree-factor

interations. Chen [16] also considered MARS limited to two-factor interactions, but the approximation

degraded. However, for the water reservoir problem, two-factor interactions were sufﬁcient. In addition,

the backwardprocedure was not utilizedsince preliminarytestingdemonstrateda verylarge computational

burden with little change on the approximation. After selection of the basis functions is completed,

smoothness to achieve a certain degree of continuity may be applied. In our case, quintic functions were

used to achieve second derivative continuity (see [16]). The primary disadvantage of MARS is that the

user must specify the maximum number of basis functions to be added, a parameter called M

max

. This

is very similar to the difﬁculty in selecting H for an ANN, and, like ANNs, a test data set can be used

to select M

max

. MARS is both ﬂexible and easily implemented while providing useful information on

signiﬁcant relationships between the predictor variables and the response; however, commercial MARS

software has only recently become available from Salford Systems (www.salford-systems.com).

For our study, our own C code was employed.

From the perspective of SDP value function approximation, MARS and ANNs are both excellent for

modeling in high dimensions when noise is small relative to the signal, as is the case with SDP. Their

main difference is the interpretability of the approximation, but this is not a critical issue for accurate

SDP solutions. An issue that may arise in other SDP applications is the selection of the key parameter,

M

max

for MARS and H for ANNs. For the inventory forecasting and water reservoir problems, the value

functions have similar structure fromstage to stage; thus, the same M

max

or Hfor all stages is appropriate.

When different M

max

or H is preferred for different stages, then the SDP algorithm would greatly beneﬁt

from automatic selection of M

max

or H. This is an issue for future research.

6.1. Memory and computational requirements

The memory and computational requirements for a FF1ANN with one output variable depend on the

number of input (predictor) variables n, the number of hidden nodes H, and the size of the training data set

N. For MARS, the key quantities are n, N, the number of eligible knots K, and the maximum number of

basis functions M

max

. In this section, we will explore how the requirements might grow with increasing n

82 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

(the dimension of an SDPproblem). Chen et al. [15] set N=O(n

3

), which assumes Nis based on a strength

three OA, K=O(n), which assumes knots can only placed at the p distinct levels of the strength three OA,

and O(n)M

max

O(n

3

). In this paper, the addition of the OA–LH designs permits the placement of a

higher number of knots. However, given an adequate K, it should not be expected to increase with n since

the larger K primarily impacts the quality of univariate modeling. Based on computational experience

with a variety of value function forms, K50 is more than adequate, and a more reasonable upper limit

on M

max

is O(N

2/3

) = O(n

2

). For ANNs, H depends on n, N, and the complexity of the underlying

function. A reasonable range on H (in terms of growth) matches that of O(n)HO(N

2/3

) = O(n

2

).

One should keep in mind that the above estimates are intended to be adequate for approximating SDP

value functions, which are convex and, consequently, generally well behaved. The inventory forecasting

value function, however, does involve a steep curve due to high backorder costs.

For memory requirements, a FF1ANN requires storage of V = [(n + 1)H + H + 1] parameters.

Assuming each of these is a double-precision real number, the total number of bytes required to store a

FF1ANN grows as

O(n

2

)S

FF1ANN

= 8V O(n

3

).

The maximum total number of bytes required to store one smoothed MARS approximation with up to

three-factor interactions grows as [15]

O(n)S

MARS

= 8(6M

∗

max

+ 2n + 3Kn + 1)O(n

2

).

Thus, it appears that the memory requirement for FF1ANNs grows faster than that for MARS. However,

the largest FF1ANN tested in the paper required 5288 bytes and the largest MARS required 36,800 bytes,

so for n = 9, FF1ANNs are still considerably smaller.

Another aspect of memory requirements is memory required while constructing the approximation.

We utilized Levenberg–Marquardt (LM) backpropagation to train the FF1ANN, and a disadvantage of

the LM method lies in its memory requirements. Each step requires the storage of a (N×V) matrix and

the (V × V) Hessian approximation, so the memory needed grows as

O(n

5

)S2

FF1ANN

= O(NnH) + O(n

2

H

2

)O(n

6

).

However, if the memory at disposal is sufﬁcient, LM backpropagation is generally preferred over other

training methods because of its faster convergence. MARS construction stores up to a (N×M

max

) matrix,

resulting in a growth of

O(n

4

)S2

MARS

= O(NM

max

)O(n

5

).

The computational requirements for one iteration of our SDP statistical modeling solution approach

consist of: (i) solving the optimization in Eq. (3) for one stage t at every experimental design point and

(ii) constructing the spline approximation of the future value function. The optimization evaluates a value

function approximation and its ﬁrst derivative several times in each stage, except the last. For FF1ANNs,

(i) is performed via optimization that requires the evaluation of the output of an ANN and of its ﬁrst

derivative. The time required for these evaluations is O(nH), so we can write the total time required

to solve the SDP equation for all N points as O(WnNH), where W is the work required to solve the

minimization.

For what concerns (ii), we consider LM backpropagation, which is the one we actually used for

our FF1ANNs. The time for the computation of LM backpropagation is dominated by the Hessian

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 83

Table 1

Actual average run times (in minutes) for one SDP iteration using FF1ANN and MARS models

Model N Inventory forecasting Water reservoir

450 MHz P2 550 MHz P2 933 MHz P2 3.06 GHz IX

ANN 1331 65 min (H = 40) 90 min (H = 40) 13 min (H = 10)

MARS 1331 61 min (M

max

= 300) 43 min (M

max

= 100)

ANN 2197 185 min (H = 60) 87 min (H = 60) 18 min (H = 10)

MARS 2197 112 min (M

max

= 400) 67 min (M

max

= 100)

The FF1ANN runs used W

LM

= 125. For the inventory forecasting problem, Matlab was used to conduct the FF1ANN runs

on two Pentium II (P2) machines, and a C code executed the MARS runs on a different P2 machine. For the water reservoir

problem, all runs were conducted in Matlab on an Intel Xeon (IX) workstation; however, calling the MARS C code in Matlab

resulted in signiﬁcant slow down.

approximation and inversion. The (V×V) Hessian approximation is the product of two (N×V) matrices

that are obtained by backpropagation. Here, for each row of the matrix (which corresponds to a single

experimental design point x

j

), the computation is basically reduced to [H + 1 + (n + 1)H] products,

so the time required to obtain the gradient for all N experimental design points is O(NnH). The matrix

product requires NV

2

real valued products, so this operation (which is O(Nn

2

H

2

)) occupies the relevant

part of the time required to compute the approximation. For the inversion of a (V ×V) matrix, an efﬁcient

algorithm can provide a computational time that is O(V

2

) = O(n

2

H

2

). Therefore, the time needed to

compute one step of LMbackpropagation is dominated by the matrix product: O(Nn

2

H

2

). Deﬁne W

LM

to

be the number of steps required to attain the backpropagation goal. (Typically, W

LM

never needs to exceed

300.) Then the time required to train the network by LMbackpropagation grows as O(W

LM

Nn

2

H

2

). Thus,

the total run time for one iteration of the FF1ANN-based SDP solution grows as

O(n

7

)C

FF1ANN

= O(WNnH) + [O(W

LM

n

2

NH

2

)]O(n

9

).

The total run time for one iteration of the MARS-based SDP solution grows as [15]

O(n

7

)C

MARS

= O(WNM

max

) + O(nNM

3

max

)O(n

10

),

where the time to construct the MARS approximation (second term) dominates.

Actual average run times for one SDP iteration are shown in Table 1. For the inventory forecasting

problem, the MARS and ANN runs were conducted on different machines in different countries. Despite

this, it can been seen that the run times for the same N are comparable. In order to conduct a fairer

computational comparison on the same programming platform, considerable effort was expended to

develop a Matlab code that could access our MARS C code. Unfortunately, the ability to call C code

from Matlab is still ﬂawed, and the MARS runs suffered signiﬁcant slow down. For the water reservoir

problem, all runs were conducted in the same place; however, the slow down experienced by calling the

MARS C code from Matlab is obvious. Unfortunately, at this time, a completely fair comparison that

uses the same programming platform is not readily implementable. Overall, our experience demonstrates

that the ANN model is clearly easier to implement.

84 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

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•

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••

••

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•

•

•

•

•

ANN

OA3G

p11

H40

MARS

OA3G

p11

200

MARS

OA3G

p11

300

ANN

OA3N

p11

H40

MARS

OA3N

p11

200

MARS

OA3N

p11

300

ANN

OA3P

p11

H40

MARS

OA3P

p11

200

MARS

OA3P

p11

300

0

4

8

1

5

9

A

b

s

o

l

u

t

e

E

r

r

o

r

2

3

6

7

11

12

13

14

15

10

Fig. 3. Inventory forecasting: Boxplots illustrate the distribution of absolute error for all 9 SDP solutions using strength 3 OAs

with p = 11 (N = 1331). Below each boxplot, the ﬁrst line indicates the use of ANNs or MARS. The second line indicates the

type of OA, speciﬁcally: OA3G = “good” strength 3 OA, OA3N = “neutral” strength 3 OA, and OA3P = “poor” strength 3 OA.

The third line speciﬁes p = 11, and the fourth line provides M

max

for MARS and the number of hidden nodes (H) for ANNs.

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•

••

••

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•••

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•••

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••

•

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•

ANN

OA3G

p13

H60

MARS

OA3G

p13

300

MARS

OA3G

p13

400

ANN

OA3N

p13

H60

MARS

OA3N

p13

300

MARS

OA3N

p13

400

ANN

OA3P

p13

H60

MARS

OA3P

p13

300

MARS

OA3P

p13

400

0

4

8

1

5

9

A

b

s

o

l

u

t

e

E

r

r

o

r

2

3

6

7

11

10

12

13

14

15

Fig. 4. Inventory forecasting: Boxplots illustrate the distribution of absolute error for all 9 SDP solutions using strength 3 OAs

with p = 13 (N = 2197). Labeling below the boxplots uses the same notation as that in Fig. 3.

6.2. SDP solutions

Both the nine-dimensional inventory forecasting problem and the eight-dimensional water reservoir

problem were solved over three stages (T = 3). Although several FF1ANN architectures were tested,

only one FF1ANN architecture for each design was employed to generate the plots in Figs. 3–8 For the

inventory forecasting problem, H = 40 for N = 1331 and H = 60 for N = 2197, and for the water

reservoir problem, H = 10 for both N. Several MARS approximations were constructed for each design

by varying M

max

and K. For the inventory forecasting problem, results with different M

max

are shown,

and for the water reservoir problem, M

max

= 100. For the OAs we set K = 9 for p = 11 and K = 11

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 85

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•

•••

•

•

•

ANN

OA3P

p11

H40

ANN

LH1G

N1331

H40

MARS

OA3P

p11

200

MARS

LH2G

N1331

200

K9

MARS

LH2N

N1331

200

K9

ANN

OA3N

p11

H40

ANN

LH1N

N1331

H40

MARS

OA3P

p11

300

MARS

LH2G

N1331

300

K35

MARS

LH2P

N1331

300

K17

A

b

s

o

l

u

t

e

E

r

r

o

r

0

4

8

1

5

9

2

3

6

7

11

10

12

13

14

15

Fig. 5. Inventory forecasting: Boxplots illustrate the distribution of absolute error for 10 SDP solutions using N =1331. Included

fromFig. 3 are the best (ANN/OA3P; MARS/OA3P/M

max

=200) and worst (ANN/OA3N; MARS/OA3P/M

max

=300) solutions.

Beloweach boxplot, the ﬁrst line indicates the use of ANNs or MARS. The second line indicates the type of experimental design,

speciﬁcally: OA3 notation as in Fig. 3, LH1G = ﬁrst LH randomization based on a “good” strength 3 OA, LH2G = second LH

randomization based on a “good” strength 3 OA, and similarly for LH1N, LH2N, LH1P, and LH2P. The third line indicates the

size of the design, specifying p = 11 for the OAs and N = 1331 for the OA–LH designs. The fourth line provides M

max

for

MARS and the number of hidden nodes (H) for ANNs. Finally, a ﬁfth line appears for the OA–LH/MARS solutions indicating

the number of eligible knots (K) utilized in the MARS algorithm. The three best OA–LH-based solutions are shown beside the

best OA-based solutions (in the left half), and similarly for the worst solutions (in the right half).

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ANN

OA3G

p13

H60

ANN

LH2G

N2197

H60

MARS

OA3G

p13

400

MARS

LH2G

N2197

400

K11

MARS

LH2N

N2197

300

K17

ANN

OA3N

p13

H60

ANN

LH1P

N2197

H60

MARS

OA3P

p13

400

MARS

LH2P

N2197

400

K11

MARS

LH1P

N2197

400

K17

A

b

s

o

l

u

t

e

E

r

r

o

r

0

4

8

1

5

9

2

3

6

7

11

10

12

13

14

15

Fig. 6. Inventory forecasting: Boxplots illustrate the distribution of absolute error for 10 SDP solutions using N = 2197 exper-

imental design points. Included from Fig. 4 are the best (ANN/OA3G, MARS/OA3G/M

max

= 400) and worst (ANN/OA3N,

MARS/OA3P/M

max

= 400 solutions. Labeling below the boxplots uses the same notation as that in Fig. 5.

for p = 13 (the maximum allowable in both cases). For the OA–LH designs K was chosen as high as

50. Simulations using the “reoptimizing policy” described in Chen [16] were conducted to determine the

optimal decisions and to test the SDP solutions.

86 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

A

b

s

o

l

u

t

e

E

r

r

o

r

ANN

OA3G

p11

H10

MARS

OA3G

p11

100

ANN

OA3N

p11

H10

MARS

OA3N

p11

100

ANN

OA3P

p11

H10

MARS

OA3P

p11

100

ANN

OA3G

p13

H10

MARS

OA3G

p13

100

ANN

OA3N

p13

H10

MARS

OA3N

p13

100

ANN

OA3P

p13

H10

MARS

OA3P

p13

100

0

4

8

1

5

9

2

3

6

7

10

Fig. 7. Water reservoir: Boxplots illustrate the distribution of absolute error for all 12 SDP solutions using strength 3 OAs with

p = 11 (N = 1331) and p = 12 (N = 2197). Labeling below the boxplots uses the same notation as that in Fig. 3.

A

b

s

o

l

u

t

e

E

r

r

o

r

ANN

OA3N

p11

H10

ANN

LH1G

N1331

H10

MARS

OA3N

p13

100

MARS

LH1G

N1331

100

K50

MARS

LH1G

N2197

100

K50

ANN

LH1N

N2197

H10

ANN

OA3P

p11

H10

ANN

LH1P

N1331

H10

MARS

OA3P

p13

100

MARS

LH1P

N1331

100

K50

MARS

LH1N

N2197

100

K50

ANN

LH1G

N2197

H10

0

4

8

1

5

9

2

3

6

7

10

Fig. 8. Water reservoir: Boxplots illustrate the distribution of absolute error for 12 SDP solutions. Included from Fig. 7 are

the best (ANN/OA3N/p11, MARS/OA3N/p13) and worst (ANN/OA3P/p11, MARS/OA3P/p13) solutions. Labeling below the

boxplots uses the same notation as that in Fig. 5.

6.2.1. Inventory forecasting problem

For each of 100 randomly chosen initial state vectors, a simulation of 1000 demand forecast sequences

was conducted for the SDP solutions. The simulation output provided the 100 mean costs (corresponding

to the 100 initial state vectors), each over 1000 sequences. For each initial state vector, the smallest mean

cost achieved by a set of 90 SDP solutions was used as the “true” mean cost for computing the “errors”

in the mean costs. Boxplots in Figs. 3–6 display the distributions (over the 100 initial state vectors) of

these errors. The average over the 100 “true” mean costs was approximately 62.

C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90 87

Figs. 3 and 4 display all 18 of the OA-based SDP solutions. They are organized left to right by the

“goodness” of the OAdesign. The OA/MARS solutions with p=11 (N=1331) are all fairly close, except

for the “worst” one, which is “MARS OA3P p11 300”, i.e., the one that used the poor OAand M

max

=300.

The other MARS OA3P solution (with M

max

=200) is used to represent the “best” OA/MARS solution,

although it is essentially equivalent to the other good OA/MARSsolutions. For the OA/FF1ANNsolutions

with p = 11 (N = 1331), the “worst” one is “ANN OA3N p11 H40”, i.e., the one that used the neutral

OA3 (there is actually another outlier above 15). The “best” one is “ANNOA3P p11 H40”, using the poor

OA. The OA/FF1ANN solution with the good OA is not terrible, but is worst than most of the OA/MARS

solutions because of its higher median. Ideally, we would want good OAs to result in better solutions

than poor OAs; however, sometimes it does not happen this way because the poor qualities are located in

regions of the state space that are not critical to ﬁnding a good solution.

For the MARS solutions with p = 13 (N = 2197), the “best” solution is “MARS OA3G p13 400”,

which used the good OA and M

max

=400; while the “worst” is “MARS OA3P p13 400”, which used the

poor OA and M

max

= 400. For the FF1ANN solutions with p = 13 (N = 2197), the “best” solution is

with the good OA, while the “worst” is with the neutral OA. It should be noted in Figs. 3 and 4, as was

illustrated in Chen [16,17], that good OAs result in better SDP solutions on average.

Figs. 5and6displaythe best andworst solutions for eachof the four types of SDPsolutions, withthe best

solutions on the left and worst on the right. The OA/FF1ANNand OA/MARS solutions are repeated from

Figs. 3 and 4. Note the solution for “ANN LH1N N1331 H40”, which used the ﬁrst OA–LH realization

from the neutral OA. This is the “worst” solution among the FF1ANNs using OA–LH designs, but it is

actually a good solution. The interesting observation here is that the FF1ANNs performed better with the

OA–LH designs. The best solution overall is “MARS LH2G N2197 400 K11”, which used the second

OA–LH realization from the good OA, M

max

= 400, and K = 11. However, there is one disconcerting

solution, and that is “MARS LH2GN1331 300 K35”. It is troubling because it uses a LHdesign generated

from the good OA, but it is visibly one of the “worst” solutions. To some extent the goodness measures

are no longer valid for the OA–LH designs, because the randomization used in generating them may have

resulted in a poorly spaced realization.

6.2.2. Water reservoir problem

For each of 50 randomly chosen initial state vectors, a simulation of 100 demand forecast sequences

was conducted for the SDP solutions. The simulation output provided the 50 mean costs (corresponding

to the 50 initial state vectors), each over 100 sequences. The “errors” in mean costs were computed in the

same manner as the inventory forecasting problem. Boxplots in Figs. 7 and 8 display the distributions (over

the 50 initial state vectors) of these errors. The average over the 50 “true” mean costs was approximately

−47.

Fig. 7 displays all the OA-based SDP solutions. They are organized left to right by OA design size

and by the space-ﬁlling quality of the OA design. Among the SDP solutions with p =11 (N =1331) the

“worst” one is clearly “ANN OA3P p11 H=10”. The “best” one is not as easy to identify, but “ANN

OA3N p11 H=10” is seen to have the lowest median. Among the SDP solutions with p=13 (N =2197)

the “worst” one, having a signiﬁcantly longer box, is “MARS OA3P p13 100”. All the other solutions

for this size design are somewhat comparable, but “MARS OA3N p13 100” is seen to have the lowest

median. For both sizes, the worst solutions employed the poor OA, indicating that poor solutions can be

avoided by not using a poor OA. This agrees with the ﬁndings in the previous section.

88 C. Cervellera et al. / Computers & Operations Research 34 (2007) 70–90

Fig. 8 displays the best and worst solutions fromFig. 7 along with the best and worst OA–LH/FF1ANN

and OA–LH/MARS solutions. The ﬁgure is organized with the best solutions on the left and worst on the

right. Some improvement is seen using the OA–LHdesigns. Unlike the inventory forecasting problem, the

water reservoir problem should not require many interaction terms in the value function approximation;

thus, the increased univariate information from LH designs should be an advantage. Like the ﬁndings in

the previous section, the worst OA–LH/FF1ANN solutions are not bad, supporting the expectation that

ANN models perform well with OA–LH designs.

7. Concluding remarks

The statistical modeling approach for numerically solving continuous-state SDP was used to simultane-

ously study OA–LHdesigns and anANN-based implementation as alternatives to the OA/MARS method

of Chen et al. [15] and Chen [16]. In addition, the space-ﬁlling quality of the OA designs was considered.

For the SDP solutions using OA designs, good OAs reduced the possibility of a poor SDP solution. For

the inventory forecasting problem, involving signiﬁcant interaction terms, MARS performed similarly

using both OAand OA–LHdesigns, while FF1ANNsolutions noticeably improved with OA–LHdesigns.

For the water reservoir problem, overall, good solutions could be achieved using MARS models with

either good OA or OA–LH designs and FF1ANN models with good OA–LH designs. With regard to

both computational SDP requirements and quality of SDP solutions, we judged FF1ANNs and MARS

to be very competitive with each other overall. A small advantage to MARS is the information on the

relationships between the future value function and the state variables that may be gleaned from the

ﬁtted MARS model. Current research is developing a method to automatically select M

max

for MARS,

so as to permit ﬂexibility in the approximation across different SDP stages. Unfortunately, a method for

automatically selecting H for ANNs does not seem possible.

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71

1. Introduction The objective of dynamic programming (DP) is to minimize a “cost” subject to certain constraints over several stages, where the relevant “cost” is deﬁned for a speciﬁc problem. For an inventory problem, the “cost” is the actual cost involved in holding inventory, having to backorder items, etc., and the constraints involve capacities for holding and ordering items. An equivalent objective is to maximize a “beneﬁt”, such as the robustness of a wastewater treatment system against extreme conditions. The state variables track the state of the system as it moves through the stages, and a decision is made in each stage to achieve the objective. Recursive properties of the DP formulation permit a solution via the fundamental recurrence equation [1]. In stochastic dynamic programming (SDP), uncertainty is modeled in the form of random realizations of stochastic system variables, and the estimated expected “cost” (“beneﬁt”) is minimized (maximized). In particular, Markov decision processes may be modeled by a SDP formulation through which the state variables resulting from each decision comprise a Markov process. DP has been applied to many problems in engineering, such as water resources, revenue management, pest control, and wastewater treatment. For general background on DP, see Bellman [1], Puterman [2] and Bertsekas [3]. For some applications, see Gal [4], Shoemaker [5], White [6,7], Foufoula-Georgiou and Kitanidis [8], Culver and Shoemaker [9], Chen et al. [10], and Tsai et al. [11]. In high dimensions, traditional DP solution methods can become computationally intractable and attempts have been made to reduce the computational burden [12–14]. For continuous-state SDP, the statistical perspective of Chen et al. [15] and Chen [16] enabled the ﬁrst truly practical numerical solution approach for high dimensions. Their method utilized orthogonal array (OA, [17]) experimental designs and multivariate adaptive regression splines (MARS, [18]). Although MARS has been applied in several areas (e.g., [19–22]), artiﬁcial neural network (ANN) models are much more prevalent in all areas of engineering (e.g., [23–30]). Given their popularity, an ANN-based SDP solution method would be more accessible to engineers. In this paper, we present: • • • • The statistical modeling approach to solving continuous-state SDP. Implementation of ANN models in continuous-state SDP as an alternative to MARS. Implementation of OA-based Latin hypercube (OA–LH) designs [31] as an alternative to pure OAs. Consideration of the “space-ﬁlling” quality of generated experimental designs. The designs are intended to distribute discretization points so that they “ﬁll” the state space; however, generated designs of the same type do not necessarily have equivalent space-ﬁlling quality. • Comparisons between ANN and MARS value function approximations, including methodological perspectives, computational considerations, and numerical SDP solution quality on two applications.

The novelty of our study is to simultaneously consider how the SDP solution is affected by different approximation methods and designs of different types and different space-ﬁlling qualities. In the statistical perspective of continuous-state SDP, the two basic requirements are an experimental design to discretize the continuous state space and a modeling method to approximate the value function An appropriate design should have good space-ﬁlling quality, and an appropriate modeling method should be ﬂexible in high dimensions, provide a smooth approximation, and be reasonably efﬁcient. A review of several experimental designs and modeling methods is provided by Chen et al. [32] in the context of computer experiments. Of the possible modeling choices given in this review paper, only MARS, neural networks, and kriging satisfy the ﬁrst two criteria. Some preliminary exploration of the kriging model

g. none have considered OA–LH designs. Cervellera et al. However. kriging required 40 times more computational effort than MARS. one can relax the discreteness and use a continuous range of inventory levels. including the implementation of OA–LH designs. the inventory levels are inherently discrete since items are counted. six-. The SDP statistical modeling approach is given in Section 3.and seven-dimensional water reservoir SDP problems appears in Baglietto et al. convex) and the SDP data involve little noise. and the ANN model ﬁtting process has a reputation of being slow. and an eight-dimensional water reservoir problem. The grid restriction was convenient for the MARS structure. a disadvantage when a smooth convex approximation is desired. which is known to have signiﬁcant interaction effects between inventory levels and forecasts due to the capacity constraints. and in both studies MARS performed better overall. SDP applications In continuous-state DP. Inventory forecasting problem For an inventory problem. In continuous-state SDP. MARS. / Computers & Operations Research 34 (2007) 70 – 90 yielded positive results on a ten-dimensional wastewater treatment application [33]. could affect its approximation ability. Section 2 describes SDP in the context of the two applications that are later used to test our methods. which has simpler structure and is more typical of continuous-state SDP problems. and nine-state variables modeled over three stages. and Section 6 presents the comparisons between the ANNs and MARS. which would be most noticeable in low noise situations. ANN models can add extraneous curvature. computational speed is an important aspect of SDP. the existing literature does not provide sufﬁcient studies to predict how they will compare to MARS in the SDP setting. Here. the system state variables are continuous. Although it is obvious that ANN models can be employed to approximate functions. but provides no advantage for ANN models. Points of an OA design are limited to a fairly sparse grid. but solving for the maximum likelihood estimates of the kriging parameters continues to be a computational challenge. Finally. [11]. constructs a parsimonious approximation. although quite ﬂexible.. but the range of inventory levels for an item is too large to be practical for a discrete DP solution. Previous comparisons involved statistical data with considerable noise. Chen et al. but its limited structure. Studies on different experimental designs for metamodeling have been conducted [36–38]. while the OA–LH design allows points to move off the grid. kriging software is even harder to obtain than MARS software. on the other hand. For this application. Conclusions are presented in Section 7.72 C. [15] and Chen [16] solved inventory forecasting test problems with four-. we consider the nine-dimensional inventory forecasting problem. we chose the OA–LH design as a variation that might work well with ANN models. Application to ten. value functions are typically well-behaved (e. Section 5 describes ANNs. It is expected that ANN models will perform better in low noise situations. [40]. Thus. However. [39] and Baglietto et al.1. which is counter to our motivation to employ ANNs. In addition. Section 4 provides background on OA and OA–LH designs. The inventory forecasting problem . [34] and Pham and Peat [35]. and application to a 20-dimensional wastewater treatment system appears in Tsai et al. 2. Given the success of OA designs in continuous-state SDP. Comparisons between MARS andANNs for empirical modeling have been conducted by DeVeaux et al. 2.

described in Chen [16]. the capacity constraints are chosen to be restrictive. forcing interactions between the state variables. but are otherwise arbitrary. The typical V-shaped cost function common in inventory modeling is nI cv (xt . The objective function is a cost function involving inventory holding costs and backorder costs. D(t.t) . Let It be the inventory level for item i at the beginning of (i) the current stage. it is assumed that orders arrive instantly. / Computers & Operations Research 34 (2007) 70 – 90 73 uses forecasts of customer demand and a probability distribution on the forecasting updates to model the demand more accurately than traditional inventory models (see [41]). D(t. is employed here. ut is the amount ordered in stage t.1.t+1) . ut .t) . and i is the backorder cost parameter for item i. and t is the stochasticity associated with updates in the demand forecasts.1. ut ) = i=1 hi [It+1 ]+ + (i) (i) i [−It+1 ]+ . Transition function The transition function for stage t speciﬁes the new state vector to be xt+1 = ft (xt . Then the decision vector is ut = i ordered in stage t. Let D(t. . where xt is the state of the system (inventory levels and forecasts) at the beginning of stage t. t ). State and decision variables The state variables for inventory forecasting consist of the inventory levels and demand forecasts for each item. See Chen [16] for details on the stochastic modeling. let D(t. D(t. so that the sequence of future forecasts for stage t + k forms a martingale [42].C. D(t. D(t. 2.2. Then the state vector at the beginning of stage t is xt = It .1. 2. (1) where [q]+ =max{0. The evolution of these forecasts over time is modeled using the multiplicative Martingale model of forecast evolution.1. It . q}. (1). For simplicity.t+1) be the forecast made at the beginning of the current stage for the demand of item i occurring over the next stage (t + 1). for which the stochastic updates are applied multiplicatively and assumed to have a mean of one.3. Cervellera et al. For this test problem. in the form of capacity constraints. The bounds placed on the state variables in each stage are necessary to ensure accurate modeling over the state space. (1) (2) (3) T (i) ut .t) be the forecast made at the beginning of the current stage for the demand of item i occurring over the stage. in the form of state space bounds. and on the state variables. It . Similarly. hi is the holding cost parameter for item i. where ut 2.t+1) . ut .t+1) (1) (2) (3) (1) (2) (3) (1) (2) (3) T (i) . For our nine-dimensional problem. D(t. The smoothed version of Eq. Suppose (i) we are currently at the beginning of stage t. Let ut (i) be the amount of item i ordered at the is the amount of item beginning of stage t. ut . The decision variables control the order quantities. we have three items and two forecasts for each.t) . Objectives and constraints The constraints for inventory forecasting are placed on the amount ordered.

1. The coefﬁcients of the linear combinations (at . Thus. Gal [4].g. wt . wt .g. Water reservoir problem Optimal operation of water reservoir networks has been studied extensively in the literature (e. Reservior network. In this paper. 2. . (2) where t is a random correction that follows a standard normal distribution. t . while the outputs correspond to the amount of water to be released during a given time stage (e. Archibald et al. a month). State and decision variables In a realistic representation of inﬂow dynamics. Lamond and Sobel [44]. Foufoula-Georgiou and Kitanidis [8]. t . Cervellera et al.. In typical models. The actual values of the coefﬁcients used for the model were based on the one-reservoir real model described in Gal [4] and extended to our four-reservoir network. t (1) (2) (3) (4) (1) (2) (3) (4) T .g. ct ) actually depend on t. / Computers & Operations Research 34 (2007) 70 – 90 Fig. t . so that it is possible to model proper external inﬂow behaviors for different months. wt . 2. has the form (i) t = at (i) (i) t−1 + bt + c t (i) (i) (i) t .. (2).74 C. the inputs to the nodes are water released from upstream reservoirs and stochastic inﬂows from external sources (e. 1.2. Given Eq. The water reservoir network we consider consists of four reservoirs (see Fig.. bt . Turgeon [45] and Yalpwotz [46] provides an excellent survey). the amount of (random) water ﬂowing into the reservoirs from external sources during a given stage t depends on the amounts of past stages. the state vector consists of the water level and stochastic external inﬂow for each reservoir: xt = wt . representing the stochastic external ﬂow into reservoir i. rivers and rain). we follow the realistic modeling of Gal [4] and use an autoregressive linear model of order one. [43]. 1 for the conﬁguration). the ith component of the random vector t .2.

etc. ) = z+ − 2 z− − 2 z− . W wt+1 = min wt + ⎭ ⎩ (i) j ∈U where U (i) the set of indexes corresponding to the reservoirs which release water into reservoir i. In order to deal with unexpected peaks from stochastic external inﬂows.C.g. Thus. ⎪ 2 3 2 3 3 3 ⎪ ⎪ ⎪ 2 ⎪ ⎩ z+ 1 . For the modeling beneﬁts. 0 z . To facilitate numerical minimization.2. wt .2. ut . 3. ⎩ ⎭ i j ∈U i where R (i) the maximum pumpage capability for reservoir i. the new water level is ⎫ ⎧ ⎬ ⎨ (j ) (i) (i) (i) (i) (i) .1 . The decision vector is ut = where ut be the amount of water released from reservoir i during stage t. Objectives and constraints (i) The constraints for water reservoir management are placed on the water releases ut in the form: ⎧ ⎫ ⎨ ⎬ (j ) (i) (i) 0 ut min wt + ut . we can update them using Eq.2. that is analogous to the smoothed cost function for the inventory forecasting problem. In our example. each reservoir has a ﬂoodway. ⎪ ⎪ ⎪ 3 ⎪ ⎨ 2 2 3 153 2 4 1 1 45 g(z. ut − u t + t . 2. R (i) . For the stochastic external inﬂows. the intuitive cost would be |wt − wt |. The ob(i) jective function is intended to maintain a reservoir’s water level close to a target value wt and maximize ˜ beneﬁt represented by a concave function g of the water releases and/or water levels (e. depending on suitable parameters and .3. so that the amount of water never exceeds the maximum value W (i) . Cervellera et al. For maintaining targets. ut . z . ut . This implies nonnegativity of wt+1 . we utilized a smoothed version.. 4) at the beginning of stage t. 2 3 Such a function models a beneﬁt which becomes relevant for “large” values of the water releases. Like the inventory forecasting model. 2. ut . (i) (i) t the (1) (2) (3) (4) T ut .). we used R (i) for and a small number 0. . (2). irrigation. / Computers & Operations Research 34 (2007) 70 – 90 75 where wt (i) is the amount of water in reservoir i (i = 1. denoted by l wt . and stochastic external inﬂow into reservoir i during stage t. The amount of water at stage t + 1 reﬂects the ﬂow balance between the water that enters (upstream releases and stochastic external inﬂows) and the water that is released. Transition function The transition function for stage t updates the water levels and external inﬂows. we consider a nonlinear concave function g of the following form (for z ∈ [0. power genera(i) (i) ˜ tion. the two equations above can be grouped in the compact transition function xt+1 = ft (xt . +∞)): ⎧ 1 ⎪ ( + 1)z. 2. z . t ). which is a V-shaped (i) (i) ˜ function.

Then.t. (xt . ut . / Computers & Operations Research 34 (2007) 70 – 90 for .. where the p(i) . Chen [16] additionally explored strength two OAs . wt ˜ − i=1 p(i) g ut . Chen et al. ﬁrst by assuming FT +1 (xT +1 ) ≡ 0. t ) + Ft+1 (xt+1 )} ut s. then constructs an approximation. p = 13 was the highest number of levels explored). We seek to estimate the unknown relationship between the state vector and the future value function. but univariate modeling can suffer due to the small number of distinct levels in each dimension (e. For continuous states. a numerical SDP solution requires a computationally tractable approximation method for the future value function. The choice of the strength three OAs was motivated by the desire to model interactions. xt+1 = ft (xt . given a ﬁnite time horizon T.76 C. the future value function provides the optimal cost to operate the system from stage t through T as a function of the state vector xt . 2. The complete future value function is obtained by solving this optimization problem for all possible beginning states. 3. [15] introduced this statistical perspective using strength three OAs and MARS (smoothed with quintic functions) applied to the inventory forecasting test problems. i = 1. (3) If we have the future value functions for all the stages. The recursive formulation permits the DP backward solution algorithm [1]. then solving in order for FT (·) through F1 (·). . [47] for further details. except in simple cases where an analytical solution is possible. Thus. ut ) ∈ t . Following the notation in Section 2. this is written recursively as Ft (xt ) = min E{c(xt . ut . (i) (i) . we can track the optimal solution through the value functions. then given the initial state of the system. the corresponding optimal cost yields one point on that stage’s value function. . Cervellera et al. t ). FT (·).g. t ) = i=1 l (i) (i) wt . the total cost function at stage t can be written as 4 4 ct (xt . 4 are weights chosen to balance the beneﬁts against the costs. Future value function For a given stage. . let the state vector be the vector of predictor variables. (3). SDP statistical modeling solution approach 3. the basic procedure uses an experimental design to choose N points in the n-dimensional state space so that one may accurately approximate the future value function. this is an inﬁnite process. so that FT (xT ) = cT (xT ) (where cT (xT ) is the cost of the ﬁnal stage depending only on xT ). the basic SDP problem is to ﬁnd F1 (·). Thus.2. Thus. From a statistical perspective. ability to identify important interactions. . ut . Response observations for the future value function may be collected via the minimization in Eq. MARS was chosen due to its ease of implementation in high dimensions. See the description in Chen [16] or Chen et al. . and easy derivative calculations. 3. 3. Numerical solution algorithm Given the state of the system at the beginning of the current stage.1.

However. and P be the set of n design points in D. There are two basic ways to measure space-ﬁlling quality: minimax and maximin (refer to [32]). / Computers & Operations Research 34 (2007) 70 – 90 77 with equivalent N to the strength three OAs. Cervellera et al.C. To avoid this. then choose the best of the bunch. then uses multi-linear interpolation to estimate the future value function. Measuring space-ﬁlling quality There are a variety of ways to generate OAs (e. contains all pn level combinations.1. 4. . Therefore. using a full factorial grid or some type of sampling scheme. Two conﬁgurations of design points. the one on the left is seen to space the points better. each at p levels. the classical solution method discretizes the state space with a full grid. A design that represents D well will have lower MAXDIST(D. this measure is usually calculated over a ﬁnite sample of points in D. Let D be the n-dimensional closed and bounded set of the continuous state space.e. a full factorial grid of p d points replicated times is represented. Looking at the two conﬁgurations of points in Fig.. Chen [17] has conducted the only study of how this quality affects an approximation. 2. In practice. . y) . contains all possible level combinations in any subset of d dimensions. However. each at p levels. A full factorial design for n variables. OAs are special forms of fractional factorial designs. with the same frequency. deﬁne: MAXDIST(D. this measure is generally impractical to calculate in high dimensions. however.g. x∈D y∈P Since the supremum over the inﬁnite set of points in D is difﬁcult to calculate. P) = sup min d(x. may be employed. and only OAs of strength three were studied. Minimax criteria seek to minimize the maximum distance between (nondesign) points in D and the nearest-neighbor design point in P. i. for which the number of points grows exponentially as the dimension increases. This full grid is equivalent to a full factorial experimental design. their performance was disappointing. 4.. 2. taking a subset of the full grid. [48–53]). An OA of strength d (d < n) for n variables. P) than a design that does not. 4 3 x1 2 1 0 • • • • • 0 1 2 x2 3 4 x1 4 3 2 1 0 • • • • • 0 1 2 x2 3 4 Fig. when projected down onto any d dimensions. calculate various space-ﬁlling measures. there is no way to guarantee their space-ﬁlling quality. Using the same distance measure as above. Discretizations based on OAs In continuous-state SDP. a fractional factorial design. one can generate many OAs. but with lower order balance permitting higher p.

a total of 6 OAs and 12 OA–LH designs were tested. For each size (N = 1331 and 2197). 5. Haykin [55]. we utilize the strength three OAs described in Chen [17]. For the OA designs in this paper. the underlying OA provides some balance. one “good”. The input layer consists of n nodes. only OAs of strength two and higher are technically orthogonal. n predictors and one response. y) be a distance measure (commonly Euclidean distance) over R.2. and for the water reservoir problem. so the LH design does not maintain this property. for statistical perspectives see White [57]. and the output layer consists of one node for the output variable. In other words. eight-dimensional designs were generated. nine-dimensional designs were generated. / Computers & Operations Research 34 (2007) 70 – 90 Maximin criteria seek to maximize the minimum distance between any pair of points in P. an ANN model is a nonlinear parameterized function that computes a mapping of n input variables into (typically) one output variable. and two realizations of OA–LH designs were generated for each OA. Artiﬁcial neural networks 5. Cherkassky and Mulier [56]. Connections between nodes can “feed back” to previous . their space-ﬁlling quality was judged using measures of both types and a measure introduced by Chen [17]. The basic architecture of ANNs is an interconnection of neural nodes that are organized in layers. one for each input variable. the points will correspond to N distinct levels in that dimension. Barron et al. With regard to approximating a function. the LH design provides more information along a single dimension (for univariate terms). Let d(x. Ripley [59]. for approximation capabilities see Barron [61]).78 C. Cervellera et al. For the inventory forecasting problem. 4. Model description ANNs are mathematical modeling tools widely used in many different ﬁelds (for general background and applications see Lippmann [54]. i. OA-based LH designs LH designs are equivalent to OA designs of strength one. Bertsekas and Tsitsiklis [14]. [58]. and one “poor” OA was selected based on space-ﬁlling measures described above. However. From a purely “analytical” perspective. one “neutral”. Although OA–LH designs only satisfy LH properties. was introduced by Tang [31] to address the lack of orthogonality in LH designs. Activation functions deﬁne transformations between layers. and the OA–LH designs are based on these strength three OAs.1. if we project the N points of a LH design onto any single dimension. ⎭ x∈P ⎩ y∈P y=x Higher MINDIST(P) should correspond to a more uniform scattering of design points. A hybrid OA–LH design. Then deﬁne: ⎧ ⎫ ⎨ ⎬ MINDIST(P) = min min d(x. In between there are hidden layers which induce ﬂexibility into the modeling. the simplest one being a linear function. while the OA design provides better coverage in higher dimensions (for interactions).e. In this paper. for which an LH design is (randomly) created from an OA structure. y) .. Thus. we employed strength three OAs with p = 11 levels (N = 1331) and p = 13 levels (N = 2197) in each dimension. Speciﬁcally. or Cheng and Titterington [60].

in order to compute the gradient with respect to the entire set of parameters. where ∇LOF(wk ) is the gradient of the LOF function with respect to the vector wk .2.a. and (ii) a backward phase in which the gradient is actually computed on the basis of the values obtained in the forward phase. where for each hidden node h n Zh = Tanh i=1 vih xi + h .e.. vj h as weights linking input nodes j to hidden nodes h. but for function approximation. due to the . a. we will refer to the entire vector of parameters as w in the following sections. Implementation of this approach is very simple. the training data set. / Computers & Operations Research 34 (2007) 70 – 90 79 layers. Cervellera et al. then “backpropagates” the partial derivatives through the hidden layers. A comprehensive description of various ANN forms may be found in [55]. In our inventory forecasting SDP application. This is completed in two phases: (i) a forward phase in which an input xj is presented to the network in order to generate the various outputs (i. Nonlinear optimization techniques used to conduct the minimization are typically gradient descent-based methods. the descent algorithm step is completed by upgrading the vector of parameters w using the steepest-descent method: wk+1 = wk − k ∇LOF(wk ). After all N samples are presented to the network and the corresponding gradients are computed. the output of the network and those of the inner activation functions) corresponding to the current value of the parameters. ) = Tanh ˆ h=1 wh Z h + . The parameters vih . wh as weights linking hidden nodes h to the output node. we utilized a feedforward one-hidden-layer ANN (FF1ANN) with a “hyperbolic tangent” activation function: Tanh(x) = (ex − e−2x )/(ex + e−x ). We used the backpropagation method (see [62.k.C. Model ﬁtting Our training employed a batch processing method (as opposed to the more common on-line processing) that minimized the squared error loss lack-of-ﬁt (LOF) criterion: N LOF(g) = ˆ j =1 [yj − g(xj . w)]2 . since the computation of the gradient requires only products. the typical ANN is feedforward only with one hidden layer and uses “sigmoidal” activation functions (monotonic and bounded). which computes the gradient of the output with respect to the outer parameters. wh . 5. w. v. and h and as constant terms called “bias” nodes (like intercept terms).63]). Deﬁne n as the number of input variables. For simplicity. h . . and are estimated using a nonlinear least-squares approach called training. Then our ANN model form is H g(x. H as the number of hidden nodes.. ˆ where N is the number of data points on which the network is being trained.

where e(w) = [y1 − g(x1 . determines the architecture. When = 0 we have a standard Newton method with an approximated Hessian matrix (Gauss–Newton method). For a FF1ANN. After each successful step (i. For our applications. as well as methods to avoid or reduce overﬁtting (see [55]). Each row of the matrix contains the gradient of the jth single error term yj − g(xj . the network merely “memorizes” the data at the expense of generalization capability). Unfortunately. yN − g(xN .e. H. the best results for the eight-dimensional water reservoir problem were obtained using H = 10 for both sample sizes. Cervellera et al. is the Levenberg–Marquardt method (ﬁrst introduced in [64]). .3. Model implementation Other than the selection of a model ﬁtting approach. which is more accurate near the minima.e. it is not possible to deﬁne “a priori” the optimal number of hidden nodes.2. . . Thus.. the choice of the stepsize k is crucial for acceptable convergence. Too few nodes would result in a network with poor approximation properties. such as entrapment in local minima. the number of nodes in the hidden layer. but the choice of a good architecture requires several modeling attempts and is always very dependent on the particular application. we identiﬁed the appropriate number of hidden nodes by exploring many architectures and checking the average cost using a test data set from the simulation described in Section 6. while it is increased when the step degrades the LOF. The best training algorithm for FF1ANNs. The best results for the nine-dimensional inventory forecasting problem were obtained for values of H = 40 for N = 1331 and H = 60 for N = 2197. and very different stepsizes may be appropriate for different applications. since it depends on the number of samples available and on the smoothness of the function we want to approximate.e. Similarly. There are many rules of thumb and methods for model selection and validation in the literature. it makes use of the Hessian matrix) Newton method. 5. . when the LOF decreases) is decreased. w) with respect to the set of parameters w. w). the method is close to gradient descent with a small stepsize. . the most important decision in implementing an ANN model is the choice of architecture. while too many would “overﬁt” the training data (i. backpropagation presents many well-known disadvantages.80 C. in terms of rate of convergence. a tradeoff between these two possibilities is needed. For larger values of H the solutions worsened. the appropriate number of hidden nodes is never clear-cut. ˆ The update rule for the parameter vector at each step is wk+1 = wk − [J [e(wk )]T J [e(wk )] + I ]−1 J [e(wk )]T e(wk )T . w)]T ˆ ˆ and J [e(w)] is the Jacobian matrix of e(w). As a consequence.. / Computers & Operations Research 34 (2007) 70 – 90 mathematical structure of the network. which is an approximation of the classic second-order (i. Therefore. Since our LOF criterion is quadratic. Unfortunately.. we can approximate its Hessian matrix via backpropagation as J [e(w)]T J [e(w)]. Existing theoretical bounds on the accuracy of the approximation are non-constructive or too loose to be useful in practice. When is large.

the same Mmax or H for all stages is appropriate. An issue that may arise in other SDP applications is the selection of the key parameter. From the perspective of SDP value function approximation. smoothness to achieve a certain degree of continuity may be applied. After selection of the basis functions is completed. / Computers & Operations Research 34 (2007) 70 – 90 81 6. such as Matlab’s (www. From a statistical perspective. however. Memory and computational requirements The memory and computational requirements for a FF1ANN with one output variable depend on the number of input (predictor) variables n. together with the existence of accessible software. Cervellera et al.com). two-factor interactions were sufﬁcient. quintic functions were used to achieve second derivative continuity (see [16]). The search for new basis functions can be restricted to interactions of a maximum order. Their main difference is the interpretability of the approximation.C. the number of hidden nodes H. This is very similar to the difﬁculty in selecting H for an ANN. When different Mmax or H is preferred for different stages. the backward procedure was not utilized since preliminary testing demonstrated a very large computational burden with little change on the approximation. In addition. MARS was restricted to explore up to three-factor interations.com) Neural Network Toolbox. which was used in our study. For MARS. For the inventory forecasting problems. like ANNs. for the water reservoir problem. The second disadvantage occurs because it is tempting to try to ﬁt the data as closely as possible even when it is not appropriate. the key quantities are n. our own C code was employed. Mmax for MARS and H for ANNs. but the approximation degraded. For our study. 6. In our case. N. a parameter called Mmax .salford-systems. Chen [16] also considered MARS limited to two-factor interactions. due to their proven ability to ﬁt any data set and to approximate any real function. commercial MARS software has only recently become available from Salford Systems (www. then the SDP algorithm would greatly beneﬁt from automatic selection of Mmax or H. The primary disadvantages are (1) the difﬁculty in selecting the number of hidden nodes H and (2) potential overﬁtting of the training data. as is the case with SDP. a test data set can be used to select Mmax . but this process greatly increases the computational effort required. but this is not a critical issue for accurate SDP solutions. ANNs have the additional disadvantage of an approximation that does not provide interpretable information on the relationships between the input (predictor) variables and output (response) variable. However. The approximation bends to model curvature at “knot” locations. MARS [18] is based on traditional statistical thinking with a forward stepwise algorithm to select terms in a linear model followed by a backward procedure to prune the model. This is an issue for future research. and. In this section. and the maximum number of basis functions Mmax . MARS and ANNs are both excellent for modeling in high dimensions when noise is small relative to the signal.1. we will explore how the requirements might grow with increasing n .mathworks. ANNs and MARS comparisons ANNs have become very popular in many areas of science and engineering. The primary disadvantage of MARS is that the user must specify the maximum number of basis functions to be added. and one of the objectives of the forward stepwise algorithm is to select appropriate knots. MARS is both ﬂexible and easily implemented while providing useful information on signiﬁcant relationships between the predictor variables and the response. For the inventory forecasting and water reservoir problems. the number of eligible knots K. and the size of the training data set N. thus. Both disadvantages can be handled by proper use of a test data set. the value functions have similar structure from stage to stage.

However. The time for the computation of LM backpropagation is dominated by the Hessian . [15] set N =O(n3 ). which are convex and. and a more reasonable upper limit on Mmax is O(N 2/3 ) = O(n2 ). if the memory at disposal is sufﬁcient. However. Chen et al. H depends on n. For what concerns (ii). The inventory forecasting value function. Another aspect of memory requirements is memory required while constructing the approximation. which is the one we actually used for our FF1ANNs. given an adequate K. LM backpropagation is generally preferred over other training methods because of its faster convergence. (i) is performed via optimization that requires the evaluation of the output of an ANN and of its ﬁrst derivative. (3) for one stage t at every experimental design point and (ii) constructing the spline approximation of the future value function. and O(n) Mmax O(n3 ). consequently. where W is the work required to solve the minimization. so we can write the total time required to solve the SDP equation for all N points as O(WnNH). Based on computational experience with a variety of value function forms. However. Each step requires the storage of a (N×V ) matrix and the (V × V ) Hessian approximation. it should not be expected to increase with n since the larger K primarily impacts the quality of univariate modeling. the addition of the OA–LH designs permits the placement of a higher number of knots. Thus. / Computers & Operations Research 34 (2007) 70 – 90 (the dimension of an SDP problem). One should keep in mind that the above estimates are intended to be adequate for approximating SDP value functions. the total number of bytes required to store a FF1ANN grows as O(n2 ) SFF1ANN = 8V O(n3 ). a FF1ANN requires storage of V = [(n + 1)H + H + 1] parameters. The optimization evaluates a value function approximation and its ﬁrst derivative several times in each stage.82 C. Cervellera et al. K 50 is more than adequate. which assumes N is based on a strength three OA. N. and the complexity of the underlying function. the largest FF1ANN tested in the paper required 5288 bytes and the largest MARS required 36. so for n = 9. however. The computational requirements for one iteration of our SDP statistical modeling solution approach consist of: (i) solving the optimization in Eq. and a disadvantage of the LM method lies in its memory requirements. K =O(n). which assumes knots can only placed at the p distinct levels of the strength three OA. For memory requirements. For ANNs. resulting in a growth of O(n4 ) S2MARS = O(NMmax ) O(n5 ). In this paper. MARS construction stores up to a (N ×Mmax ) matrix. A reasonable range on H (in terms of growth) matches that of O(n) H O(N 2/3 ) = O(n2 ). For FF1ANNs. except the last. we consider LM backpropagation. The time required for these evaluations is O(nH). so the memory needed grows as O(n5 ) S2FF1ANN = O(NnH) + O(n2 H 2 ) O(n6 ).800 bytes. it appears that the memory requirement for FF1ANNs grows faster than that for MARS. does involve a steep curve due to high backorder costs. We utilized Levenberg–Marquardt (LM) backpropagation to train the FF1ANN. FF1ANNs are still considerably smaller. The maximum total number of bytes required to store one smoothed MARS approximation with up to three-factor interactions grows as [15] ∗ O(n) SMARS = 8(6Mmax + 2n + 3Kn + 1) O(n2 ). Assuming each of these is a double-precision real number. generally well behaved.

The total run time for one iteration of the MARS-based SDP solution grows as [15] O(n7 ) CMARS = O(WNMmax ) + O(nNM3 ) O(n10 ). however. it can been seen that the run times for the same N are comparable. Here. WLM never needs to exceed 300. In order to conduct a fairer computational comparison on the same programming platform. / Computers & Operations Research 34 (2007) 70 – 90 Table 1 Actual average run times (in minutes) for one SDP iteration using FF1ANN and MARS models Model N Inventory forecasting 450 MHz P2 ANN MARS ANN MARS 1331 1331 2197 2197 65 min (H = 40) 185 min (H = 60) 550 MHz P2 61 min (Mmax = 300) 112 min (Mmax = 400) 933 MHz P2 90 min (H = 40) 87 min (H = 60) Water reservoir 3. the total run time for one iteration of the FF1ANN-based SDP solution grows as O(n7 ) CFF1ANN = O(WNnH) + [O(WLM n2 NH2 )] O(n9 ). Overall. an efﬁcient algorithm can provide a computational time that is O(V 2 ) = O(n2 H 2 ).06 GHz IX 83 13 min (H = 10) 43 min (Mmax = 100) 18 min (H = 10) 67 min (Mmax = 100) The FF1ANN runs used WLM = 125. Thus. calling the MARS C code in Matlab resulted in signiﬁcant slow down. Actual average run times for one SDP iteration are shown in Table 1.C. For the inversion of a (V × V ) matrix. Despite this. max where the time to construct the MARS approximation (second term) dominates. Unfortunately. For the inventory forecasting problem. all runs were conducted in the same place. For the water reservoir problem. a completely fair comparison that uses the same programming platform is not readily implementable. however. For the inventory forecasting problem. the MARS and ANN runs were conducted on different machines in different countries. the slow down experienced by calling the MARS C code from Matlab is obvious. For the water reservoir problem. Matlab was used to conduct the FF1ANN runs on two Pentium II (P2) machines. the computation is basically reduced to [H + 1 + (n + 1)H ] products. Cervellera et al. Deﬁne WLM to be the number of steps required to attain the backpropagation goal. The (V ×V ) Hessian approximation is the product of two (N ×V ) matrices that are obtained by backpropagation. the ability to call C code from Matlab is still ﬂawed. Therefore. our experience demonstrates that the ANN model is clearly easier to implement. . so the time required to obtain the gradient for all N experimental design points is O(NnH). considerable effort was expended to develop a Matlab code that could access our MARS C code. approximation and inversion. at this time. The matrix product requires NV 2 real valued products. the time needed to compute one step of LM backpropagation is dominated by the matrix product: O(Nn2 H 2 ). for each row of the matrix (which corresponds to a single experimental design point xj ). and the MARS runs suffered signiﬁcant slow down.) Then the time required to train the network by LM backpropagation grows as O(WLM Nn2 H 2 ). so this operation (which is O(Nn2 H 2 )) occupies the relevant part of the time required to compute the approximation. (Typically. and a C code executed the MARS runs on a different P2 machine. Unfortunately. all runs were conducted in Matlab on an Intel Xeon (IX) workstation.

Although several FF1ANN architectures were tested.2. and the fourth line provides Mmax for MARS and the number of hidden nodes (H) for ANNs. / Computers & Operations Research 34 (2007) 70 – 90 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Absolute Error ANN MARS MARS ANN MARS MARS ANN MARS MARS OA3G OA3G OA3G OA3N OA3N OA3N OA3P OA3P OA3P p11 p11 p11 p11 p11 p11 p11 p11 p11 H40 200 300 H40 200 300 H40 200 300 Fig. Inventory forecasting: Boxplots illustrate the distribution of absolute error for all 9 SDP solutions using strength 3 OAs with p = 11 (N = 1331). 4. and for the water reservoir problem. Labeling below the boxplots uses the same notation as that in Fig. only one FF1ANN architecture for each design was employed to generate the plots in Figs. 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 • • • • • • • Absolute Error • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • ANN MARS MARS ANN MARS MARS ANN MARS MARS OA3G OA3G OA3G OA3N OA3N OA3N OA3P OA3P OA3P p13 p13 p13 p13 p13 p13 p13 p13 p13 H60 300 400 H60 400 H60 300 400 300 Fig. Mmax = 100. 6. H = 10 for both N. Below each boxplot. Cervellera et al. H = 40 for N = 1331 and H = 60 for N = 2197. The third line speciﬁes p = 11. For the inventory forecasting problem. For the OAs we set K = 9 for p = 11 and K = 11 . Several MARS approximations were constructed for each design by varying Mmax and K. the ﬁrst line indicates the use of ANNs or MARS. 3. OA3N = “neutral” strength 3 OA. The second line indicates the type of OA. and OA3P = “poor” strength 3 OA. SDP solutions Both the nine-dimensional inventory forecasting problem and the eight-dimensional water reservoir problem were solved over three stages (T = 3). 3. speciﬁcally: OA3G = “good” strength 3 OA. 3–8 For the inventory forecasting problem. Inventory forecasting: Boxplots illustrate the distribution of absolute error for all 9 SDP solutions using strength 3 OAs with p = 13 (N = 2197).84 C. and for the water reservoir problem. results with different Mmax are shown.

Included from Fig. / Computers & Operations Research 34 (2007) 70 – 90 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 85 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Absolute Error ANN ANN MARS MARS MARS ANN ANN MARS MARS MARS OA3P LH1G OA3P LH2G LH2N OA3N LH1N OA3P LH2G LH2P p11 N1331 p11 N1331 N1331 p11 N1331 p11 N1331 N1331 300 H40 H40 200 200 200 H40 H40 300 300 K35 K17 K9 K9 Fig. 5. 5. . Inventory forecasting: Boxplots illustrate the distribution of absolute error for 10 SDP solutions using N = 1331. 4 are the best (ANN/OA3G. a ﬁfth line appears for the OA–LH/MARS solutions indicating the number of eligible knots (K) utilized in the MARS algorithm. For the OA–LH designs K was chosen as high as 50. The fourth line provides Mmax for MARS and the number of hidden nodes (H) for ANNs. MARS/OA3P/Mmax = 400 solutions. 3. Simulations using the “reoptimizing policy” described in Chen [16] were conducted to determine the optimal decisions and to test the SDP solutions. MARS/OA3P/Mmax =200) and worst (ANN/OA3N. Below each boxplot. The third line indicates the size of the design. speciﬁcally: OA3 notation as in Fig. and similarly for LH1N. 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 • • • • • • • • • • • • • • • • • • • • • Absolute Error • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • ANN ANN MARS MARS OA3G LH2G OA3G LH2G p13 N2197 p13 N2197 H60 H60 400 400 K11 MARS ANN ANN MARS MARS MARS LH2N OA3N LH1P OA3P LH2P LH1P N2197 p13 N2197 p13 N2197 N2197 300 H60 H60 400 400 400 K17 K11 K17 Fig. specifying p = 11 for the OAs and N = 1331 for the OA–LH designs. LH2N. Finally. MARS/OA3P/Mmax =300) solutions. LH1P. Inventory forecasting: Boxplots illustrate the distribution of absolute error for 10 SDP solutions using N = 2197 experimental design points. and similarly for the worst solutions (in the right half). Labeling below the boxplots uses the same notation as that in Fig. the ﬁrst line indicates the use of ANNs or MARS. The second line indicates the type of experimental design. LH1G = ﬁrst LH randomization based on a “good” strength 3 OA. The three best OA–LH-based solutions are shown beside the best OA-based solutions (in the left half). MARS/OA3G/Mmax = 400) and worst (ANN/OA3N. 3 are the best (ANN/OA3P. Cervellera et al. Included from Fig. and LH2P. 6.C. LH2G = second LH randomization based on a “good” strength 3 OA. for p = 13 (the maximum allowable in both cases).

8. Labeling below the boxplots uses the same notation as that in Fig. For each initial state vector. MARS/OA3N/p13) and worst (ANN/OA3P/p11. 6. Inventory forecasting problem For each of 100 randomly chosen initial state vectors.1. MARS/OA3P/p13) solutions. Included from Fig. 7 are the best (ANN/OA3N/p11. . 5. Water reservoir: Boxplots illustrate the distribution of absolute error for 12 SDP solutions. Boxplots in Figs. 3. 10 9 8 7 Absolute Error 6 5 4 3 2 1 0 ANN ANN MARS OA3N LH1G LH1G p11 N1331 N1331 H10 H10 100 K50 MARS OA3N p13 100 ANN MARS ANN ANN LH1N LH1G OA3P LH1P N2197 N2197 p11 N1331 H10 100 H10 H10 K50 MARS LH1P N1331 100 K50 MARS OA3P p13 100 ANN MARS LH1G LH1N N2197 N2197 H10 100 K50 Fig. / Computers & Operations Research 34 (2007) 70 – 90 10 9 8 7 Absolute Error 6 5 4 3 2 1 0 ANN MARS ANN MARS ANN MARS ANN MARS ANN MARS ANN MARS OA3G OA3G OA3N OA3N OA3P OA3P OA3G OA3G OA3N OA3N OA3P OA3P p13 p13 p13 p13 p13 p13 p11 p11 p11 p11 p11 p11 H10 100 H10 100 H10 100 H10 H10 100 100 H10 100 Fig. the smallest mean cost achieved by a set of 90 SDP solutions was used as the “true” mean cost for computing the “errors” in the mean costs. each over 1000 sequences. 3–6 display the distributions (over the 100 initial state vectors) of these errors. a simulation of 1000 demand forecast sequences was conducted for the SDP solutions. Water reservoir: Boxplots illustrate the distribution of absolute error for all 12 SDP solutions using strength 3 OAs with p = 11 (N = 1331) and p = 12 (N = 2197). Cervellera et al. The average over the 100 “true” mean costs was approximately 62.86 C.2. The simulation output provided the 100 mean costs (corresponding to the 100 initial state vectors). Labeling below the boxplots uses the same notation as that in Fig. 7.

C. The simulation output provided the 50 mean costs (corresponding to the 50 initial state vectors). 6. the “best” solution is “MARS OA3G p13 400”. which used the poor OA and Mmax = 400. The OA/FF1ANN solution with the good OA is not terrible. the “best” solution is with the good OA. For the OA/FF1ANN solutions with p = 11 (N = 1331). The average over the 50 “true” mean costs was approximately −47. the one that used the neutral OA3 (there is actually another outlier above 15). while the “worst” is with the neutral OA. The OA/FF1ANN and OA/MARS solutions are repeated from Figs. which is “MARS OA3P p11 300”. For the FF1ANN solutions with p = 13 (N = 2197). but it is visibly one of the “worst” solutions. 3 and 4. while the “worst” is “MARS OA3P p13 400”.2. It is troubling because it uses a LH design generated from the good OA. that good OAs result in better SDP solutions on average. Among the SDP solutions with p = 11 (N = 1331) the “worst” one is clearly “ANN OA3P p11 H = 10”. having a signiﬁcantly longer box. except for the “worst” one. because the randomization used in generating them may have resulted in a poorly spaced realization. which used the second OA–LH realization from the good OA. Cervellera et al. Mmax = 400.. each over 100 sequences. The interesting observation here is that the FF1ANNs performed better with the OA–LH designs. The “best” one is not as easy to identify. with the best solutions on the left and worst on the right.17]. as was illustrated in Chen [16. Note the solution for “ANN LH1N N1331 H40”. but it is actually a good solution. the one that used the poor OA and Mmax =300. a simulation of 100 demand forecast sequences was conducted for the SDP solutions.2. The other MARS OA3P solution (with Mmax = 200) is used to represent the “best” OA/MARS solution. indicating that poor solutions can be avoided by not using a poor OA. The “best” one is “ANN OA3P p11 H40”. i. but “MARS OA3N p13 100” is seen to have the lowest median. However. although it is essentially equivalent to the other good OA/MARS solutions. but “ANN OA3N p11 H = 10” is seen to have the lowest median. 5 and 6 display the best and worst solutions for each of the four types of SDP solutions. The “errors” in mean costs were computed in the same manner as the inventory forecasting problem. Ideally. They are organized left to right by OA design size and by the space-ﬁlling quality of the OA design. is “MARS OA3P p13 100”. sometimes it does not happen this way because the poor qualities are located in regions of the state space that are not critical to ﬁnding a good solution. there is one disconcerting solution. Among the SDP solutions with p = 13 (N = 2197) the “worst” one. however. . It should be noted in Figs. 7 displays all the OA-based SDP solutions. For the MARS solutions with p = 13 (N = 2197). we would want good OAs to result in better solutions than poor OAs. 3 and 4 display all 18 of the OA-based SDP solutions.e. Figs. using the poor OA. Water reservoir problem For each of 50 randomly chosen initial state vectors. This agrees with the ﬁndings in the previous section. i. 7 and 8 display the distributions (over the 50 initial state vectors) of these errors. Boxplots in Figs. which used the ﬁrst OA–LH realization from the neutral OA. the “worst” one is “ANN OA3N p11 H40”. / Computers & Operations Research 34 (2007) 70 – 90 87 Figs. The best solution overall is “MARS LH2G N2197 400 K11”. For both sizes. the worst solutions employed the poor OA. To some extent the goodness measures are no longer valid for the OA–LH designs. Fig. The OA/MARS solutions with p =11 (N =1331) are all fairly close. but is worst than most of the OA/MARS solutions because of its higher median. This is the “worst” solution among the FF1ANNs using OA–LH designs. 3 and 4..e. They are organized left to right by the “goodness” of the OA design. and K = 11. and that is “MARS LH2G N1331 300 K35”. All the other solutions for this size design are somewhat comparable. which used the good OA and Mmax = 400.

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