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Raw material procurement with fluctuating prices

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  • Arnold, Jan
  • Minner, Stefan
  • Eidam, Björn

Abstract

Increasing global competition and cost pressure force enterprises and supply chains to discover undetected cost-saving potentials. In particular, interfaces to the raw materials' market are a promising field for improvement. This paper presents a deterministic optimal control approach optimizing the procurement and inventory policy of an enterprise that is processing a raw material when the purchasing price, holding cost, and the demand rate fluctuate over time. Applying Pontryagin's maximum principle, the optimal policy turns out to be of a bang-bang type involving impulse and just-in-time procurement. Numerical examples illustrate the solutions obtained and compare the optimal policy with simple replenishment strategies.

Suggested Citation

  • Arnold, Jan & Minner, Stefan & Eidam, Björn, 2009. "Raw material procurement with fluctuating prices," International Journal of Production Economics, Elsevier, vol. 121(2), pages 353-364, October.
    • Handle: RePEc:eee:proeco:v:121:y:2009:i:2:p:353-364
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    References listed on IDEAS

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    1. T. Fabian & J. L. Fisher & M. W. Sasieni & A. Yardeni, 1959. "Purchasing Raw Material on a Fluctuating Market," Operations Research, INFORMS, vol. 7(1), pages 107-122, February.
    2. J-T Teng & H-L Yang, 2004. "Deterministic economic order quantity models with partial backlogging when demand and cost are fluctuating with time," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(5), pages 495-503, May.
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    4. Robert W. Grubbström & Brian G. Kingsman, 2004. "Ordering and Inventory Policies for Step Changes in the Unit Item Cost: A Discounted Cash Flow Approach," Management Science, INFORMS, vol. 50(2), pages 253-267, February.
    5. Sarker, Bhaba R. & Al Kindi, Mahmood, 2006. "Optimal ordering policies in response to a discount offer," International Journal of Production Economics, Elsevier, vol. 100(2), pages 195-211, April.
    6. Luhmer, Alfred, 1986. "A continuous time, deterministic, nonstationary model of economic ordering," European Journal of Operational Research, Elsevier, vol. 24(1), pages 123-135, January.
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    Cited by:

    1. Inderfurth, Karl & Kelle, Peter & Kleber, Rainer, 2013. "Dual sourcing using capacity reservation and spot market: Optimal procurement policy and heuristic parameter determination," European Journal of Operational Research, Elsevier, vol. 225(2), pages 298-309.
    2. Belleh Fontem & Megan Price, 2021. "Joint client selection and contract design for a risk-averse commodity broker in a two-echelon supply chain," Annals of Operations Research, Springer, vol. 307(1), pages 111-138, December.
    3. Lijo John & Anand Gurumurthy, 2022. "Are quantity flexibility contracts with discounts in the presence of spot market procurement relevant for the humanitarian supply chain? An exploration," Annals of Operations Research, Springer, vol. 315(2), pages 1775-1802, August.
    4. Sharma, Ashish & Banerjee, Snigdha, 2013. "Optimal price markup policy for an inventory model with random price fluctuations and option for additional purchase," International Journal of Production Economics, Elsevier, vol. 146(2), pages 620-633.
    5. Li, Hongyan & Meissner, Joern, 2011. "Competition under capacitated dynamic lot-sizing with capacity acquisition," International Journal of Production Economics, Elsevier, vol. 131(2), pages 535-544, June.
    6. M. Li & P. Guo & G. Yang & S. Fang, 2014. "IB-ICCMSP: An Integrated Irrigation Water Optimal Allocation and Planning Model Based on Inventory Theory under Uncertainty," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(1), pages 241-260, January.
    7. Nathalie Sick & Matthias Blug & Jens Leker, 2014. "The Influence of Raw Material Prices on the Development of Hydrogen Storage Materials: The Case of Metal Hydrides," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 5(4), pages 735-760, December.
    8. Karl Inderfurth & Peter Kelle & Rainer Kleber, 2011. "Dual Sourcing Using Capacity Reservation and Spot Market: Optimal Procurement Policy and Heuristic Parameter Determination," FEMM Working Papers 110014, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

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