Multi-period dynamic supply contracts with cancellation

Multi-period dynamic supply contracts with cancellation

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Article ID: iaor20063375
Country: United Kingdom
Volume: 32
Issue: 12
Start Page Number: 3129
End Page Number: 3142
Publication Date: Dec 2005
Journal: Computers and Operations Research
Authors:
Keywords: programming: dynamic, simulation: applications
Abstract:

This paper considers a class of multi-period dynamic supply contracts in which a buyer orders a product from a supplier in each period and the supplier allows the buyer to cancel a portion of an outstanding order with penalty during a planning horizon. We assume that both the buyer and the supplier have common knowledge. We first characterize the buyer's ordering and canceling policy that minimizes his expected cost during the planning horizon. We also characterize the supplier's optimal production policy under a very mild assumption on the costs of production and storage. Based on this structure, we then use simulation to show how the supplier chooses cancellation costs that minimize her expected cost during the planning horizon. Our simulation shows that both the buyer and the supplier would benefit from the contract.

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