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Dual Sourcing Using Capacity Reservation and Spot Market: Optimal Procurement Policy and Heuristic Parameter Determination

Author

Listed:
  • Karl Inderfurth

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Peter Kelle

    (Department of Information Systems and Decision Sciences, Louisiana State University)

  • Rainer Kleber

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

This contribution focuses on the cost-effective management of the combined use of two procurement options: the short-term option is given by a spot market with random price, whereas the long-term alternative is characterized by a multi period capacity reservation contract with fixed purchase price and reservation level. A reservation cost, proportional with the reservation level, has to be paid for the option of receiving any amount per period up to the reservation level. A long-term decision has to be made regarding the reserved capacity level, and then it has to be decided - period by period - which quantities to procure from the two sources. Considering the multi-period problem with stochastic demand and spot price, the structure of the optimal combined purchasing policy is derived using stochastic dynamic programming. Furthermore, a simple heuristic procedure is developed to determine the respective policy parameters. Finally, we present a comprehensive numerical study showing that our heuristic policy performs very well.

Suggested Citation

  • 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.
    • Handle: RePEc:mag:wpaper:110014
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    References listed on IDEAS

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    More about this item

    Keywords

    Dual sourcing; capacity reservation; spot market; procurement policy; stochastic dynamic programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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