BlueLinx can benefit from innovative inventory management methods for commodity forward buys

Commodity prices often fluctuate significantly from one purchasing opportunity to the next. These fluctuations allow firms to benefit from forward buying (buying for future demand in addition to current demand) when prices are low. We propose a combined heuristic to determine the optimal number of future periods a firm should purchase at each ordering opportunity in order to maximize total expected profit when there is uncertainty in future demand and future buying price. We compare our heuristic with existing methods via simulation using real demand data from BlueLinx, a two-stage distributor of building products. The results show that our combined heuristic performs better than any existing methods considering forward buying or safety stock separately. We also compare our heuristic to the optimal inventory management policy by full enumeration for a smaller data set. The proposed heuristic is shown to be close to optimal. This study is the first to decide both the optimal number of future periods to buy for uncertain purchase price and the appropriate purchasing quantity with safety stock for uncertain demand simultaneously. The experience suggests that the proposed combined heuristic is simple and can be very beneficial for any company where forward buying is possible.