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Capacity reservation under spot market price uncertainty

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  • Inderfurth, Karl
  • Kelle, Peter

Abstract

Capacity reservation contracts and spot markets are two alternative purchasing practices. We focus on the cost-effective management of the combined use of these two procurement sources. Due to the variability of the spot market prices and demand uncertainty, the flexibility of combined sourcing can be advantageous. Spot market purchasing is a benefit in case of low spot market prices or insufficient reserved capacity, and the capacity reservation contract is an operational risk hedging for high spot market price incidents. The structure of the optimal combined purchasing policy is complex. In this paper we consider a simple and easy-to-implement capacity reservation--base stock policy and compare it to single sourcing options. We examine the joint effect of demand and spot market price uncertainty. Our analysis shows that in the case of large spot market price variability the combined sourcing is superior over spot market sourcing even in the case of low average spot price. The combined sourcing is also superior over long-term sourcing even in the case of high average spot price if there is large spot market price variability. Analytical and simulation results are presented to show the effect of the different price, cost, and uncertainty parameters on the optimal capacity reservation--base stock policy and on the expected percentage gain over single sourcing.

Suggested Citation

  • Inderfurth, Karl & Kelle, Peter, 2011. "Capacity reservation under spot market price uncertainty," International Journal of Production Economics, Elsevier, vol. 133(1), pages 272-279, September.
    • Handle: RePEc:eee:proeco:v:133:y:2011:i:1:p:272-279
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    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. Cheaitou, Ali & Cheaytou, Rima, 2019. "A two-stage capacity reservation supply contract with risky supplier and forecast updating," International Journal of Production Economics, Elsevier, vol. 209(C), pages 42-60.
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    4. Rainer Kleber & Karl Inderfurth & Peter Kelle, 2014. "Combined sourcing and inventory management using capacity reservation and spot market," FEMM Working Papers 140005, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    5. Tarun Jain & Jishnu Hazra, 2019. "“On-demand” pricing and capacity management in cloud computing," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(3), pages 228-246, June.
    6. Rogetzer, Patricia & Silbermayr, Lena & Jammernegg, Werner, 2019. "Sustainable sourcing including capacity reservation for recycled materials: A newsvendor framework with price and demand correlations," International Journal of Production Economics, Elsevier, vol. 214(C), pages 206-219.
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    10. Karl Inderfurth & Peter Kelle & Rainer Kleber, 2018. "Inventory control in dual sourcing commodity procurement with price correlation," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 26(1), pages 93-119, March.
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    13. Canyakmaz, Caner & Özekici, Süleyman & Karaesmen, Fikri, 2019. "An inventory model where customer demand is dependent on a stochastic price process," International Journal of Production Economics, Elsevier, vol. 212(C), pages 139-152.
    14. Mohammed Alkahtani, 2022. "Mathematical Modelling of Inventory and Process Outsourcing for Optimization of Supply Chain Management," Mathematics, MDPI, vol. 10(7), pages 1-27, April.
    15. 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.
    16. Xing, Wei & Wang, Shouyang & Liu, Liming, 2012. "Optimal ordering and pricing strategies in the presence of a B2B spot market," European Journal of Operational Research, Elsevier, vol. 221(1), pages 87-98.
    17. Canyakmaz, Caner & Özekici, Süleyman & Karaesmen, Fikri, 2022. "A newsvendor problem with markup pricing in the presence of within-period price fluctuations," European Journal of Operational Research, Elsevier, vol. 301(1), pages 153-162.
    18. Hu, Xiangling & Motwani, Jaideep G., 2014. "Minimizing downside risks for global sourcing under price-sensitive stochastic demand, exchange rate uncertainties, and supplier capacity constraints," International Journal of Production Economics, Elsevier, vol. 147(PB), pages 398-409.
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    23. Suresh P. Sethi & Sushil Gupta & Vipin K. Agrawal & Vijay K. Agrawal, 2022. "Nobel laureates’ contributions to and impacts on operations management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4283-4303, December.
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