Purchasing decisions under stochastic prices: Approximate solutions for order time, order quantity and supplier selection

Purchasing decisions under stochastic prices: Approximate solutions for order time, order quantity and supplier selection

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Article ID: iaor20128192
Volume: 201
Issue: 1
Start Page Number: 287
End Page Number: 305
Publication Date: Dec 2012
Journal: Annals of Operations Research
Authors: , ,
Keywords: inventory: order policies, combinatorial optimization, simulation
Abstract:

This paper analyzes purchasing strategies for retailers regarding the best timing and amount of purchases when operating under combined timing and quantity flexibility contracts in an environment of uncertain prices. To decrease the computational complexity and make the procedure adaptable to the case of multiple suppliers, we introduce, analyze, and compare a ‘time strategy’ and a ‘target strategy’ and then develop a hybrid ‘adaptive target strategy’ to facilitate and improve the purchasing decision for the case of option contracts with generally rising prices. The adaptive target strategy is simpler and more intuitive than the traditional binomial lattice method, while the risk of failing to meet a target profit can also easily be calculated. We then extend the solution procedure to maximize expected profits in an environment of selecting among multiple suppliers with potentially different price processes, and we further provide risk analysis to help determine a good estimate for the number of option contracts from different suppliers to generate in order to create adequate risk protection. Numerical analysis demonstrates how the number of candidate suppliers impacts the expected profit and the risk. Monte Carlo simulation results demonstrate that the developed solution procedures provide satisfying outcomes and that the calculation is fast, even for multiple‐dimension and multiple‐supplier cases.

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