From approximation error to optimality gap -- Explaining the performance impact of opportunity cost approximation in integrated demand management and vehicle routing

Abstract: The widespread adoption of digital distribution channels both enables and forces more and more logistical service providers to manage booking processes actively to maintain competitiveness. As a result, their operational planning is no longer limited to solving vehicle routing problems. Instead, demand management decisions and vehicle routing decisions are optimized integratively with the aim of maximizing revenue and minimizing fulfillment cost. The resulting integrated demand management and vehicle routing problems (i-DMVRPs) can be formulated as Markov decision process models and, theoretically, can be solved via the well-known Bellman equation. Unfortunately, the Bellman equation is intractable for realistic-sized instances. Thus, in the literature, i-DMVRPs are often addressed via decomposition-based solution approaches involving an opportunity cost approximation as a key component. Despite its importance, to the best of our knowledge, there is neither a technique to systematically analyze how the accuracy of the opportunity cost approximation translates into overall solution quality nor are there general guidelines on when to apply which class of approximation approach. In this work, we address this research gap by proposing an explainability technique that quantifies and visualizes the magnitude of approximation errors, their immediate impact, and their relevance in specific regions of the state space. Exploiting reward decomposition, it further yields a characterization of different types of approximation errors. Applying the technique to a generic i-DMVRP in a full-factorial computational study and comparing the results with observations in existing literature, we show that the technique contributes to better explaining algorithmic performance and provides guidance for the algorithm selection and development process.