Valuing fixed price supply contracts

This article considers the problem of valuing a supply contract that requires the manufacturer to deliver fixed quantities of a product according to a predetermined schedule at fixed prices. Given that the raw material costs fluctuate randomly, the producer has capacity constraints, production costs depend on production rates, and that switching production rates result in additional charges, the problem is to establish an optimal production and inventory policy such that the schedule is met, and the value of the contract to the firm is maximized.