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Technical Note---Optimal Inventory Policy in the Presence of a Long-Term Supplier and a Spot Market

Author

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  • Youhua (Frank) Chen

    (Department of Management Sciences, College of Business, City University of Hong Kong, Hong Kong)

  • Weili Xue

    (School of Management and Engineering, Nanjing University, Nanjing, Jiangsu, People's Republic of China)

  • Jian Yang

    (Department of Management Science and Information Systems, Rutgers Business School, Rutgers University, Newark, New Jersey)

Abstract

We consider a stochastic inventory control problem in which a buyer makes procurement decisions while facing periodic random demand and two supply sources, namely, a long-term contract supplier and a spot market. The contract between the buyer and the supplier partially shields the latter from the vicissitudes of the spot market, in that the price paid by the buyer to the supplier is only partially linked to the spot price at the moment. After fulfilling the minimum-order commitment with the supplier, the buyer has the full freedom to source from both the supplier and the market. Procurement from the spot market also incurs a fixed setup cost. We show that an optimal policy consists of three different policy forms, with the realization of each depending on the buyer's inventory level and the prevalent spot price. Certain conditions are identified under which monotone trends exist between policy parameters and the current spot price.

Suggested Citation

  • Youhua (Frank) Chen & Weili Xue & Jian Yang, 2013. "Technical Note---Optimal Inventory Policy in the Presence of a Long-Term Supplier and a Spot Market," Operations Research, INFORMS, vol. 61(1), pages 88-97, February.
    • Handle: RePEc:inm:oropre:v:61:y:2013:i:1:p:88-97
    DOI: 10.1287/opre.1120.1114
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    References listed on IDEAS

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    3. Niu, Baozhuang & Chen, Lei & Liu, Yaoqi & Jin, Yong, 2019. "Joint price and quality decisions considering Chinese customers' variety seeking behavior," International Journal of Production Economics, Elsevier, vol. 213(C), pages 97-107.
    4. Gongli Luo & Xiaoqing Liu & Felix T. S. Chan, 2023. "Optimal Ordering Decisions in Portfolio Procurement Considering Spot Price Fluctuation," Sustainability, MDPI, vol. 15(14), pages 1-13, July.
    5. Kyle E. Binder & James W. Mjelde, 2017. "Fuel inventory and price relationships in the U.S. electric power sector under regulatory and market change," Journal of Regulatory Economics, Springer, vol. 51(2), pages 197-219, April.
    6. Niu, Baozhuang & Chu, Lap-Keung & Ni, Jian & Wang, Junwei, 2018. "Buy now and price later: Supply contracts with time-consistent mean–variance financial hedgingAuthor-Name: Li, Qiang," European Journal of Operational Research, Elsevier, vol. 268(2), pages 582-595.
    7. Jianjun Xu & Mustafa Cagri Gürbüz & Youyi Feng & Shaoxiang Chen, 2020. "Optimal Spot Trading Integrated with Quantity Flexibility Contracts," Production and Operations Management, Production and Operations Management Society, vol. 29(6), pages 1532-1549, June.
    8. Manmohan Aseri & Milind Dawande & Ganesh Janakiraman & Vijay Mookerjee, 2018. "Procurement Policies for Mobile-Promotion Platforms," Management Science, INFORMS, vol. 64(10), pages 4590-4607, October.
    9. 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.
    10. Guang Xiao & Nan Yang & Renyu Zhang, 2015. "Dynamic Pricing and Inventory Management Under Fluctuating Procurement Costs," Manufacturing & Service Operations Management, INFORMS, vol. 17(3), pages 321-334, July.
    11. Fezzeh Abanavaz & Morteza Khakzar Bafruei, 2020. "Investigating the Return of Goods in Supply Chain," International Review of Management and Marketing, Econjournals, vol. 10(4), pages 170-176.
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    13. David A. Goldberg & Martin I. Reiman & Qiong Wang, 2021. "A Survey of Recent Progress in the Asymptotic Analysis of Inventory Systems," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1718-1750, June.

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