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Zbl 1176.90444
Li, Shanling; Murat, Alper; Huang, Wanzhen
Selection of contract suppliers under price and demand uncertainty in a dynamic market. (English)
[J] Eur. J. Oper. Res. 198, No. 3, 830-847 (2009). ISSN 0377-2217

Summary: We consider a supply contracting problem in which the buyer firm faces non-stationary stochastic price and demand. First, we derive analytical results to compare two pure strategies: (i) periodically purchasing from the spot market; and (ii) signing a long-term contract with a single supplier. The results from the pure strategies show that the selection of suppliers can be complicated by many parameters, and is particularly affected by price uncertainty. We then develop a stochastic dynamic programming model to incorporate mixed strategies, purchasing commitments and contract cancellations. Computational results show that increases in price (demand) uncertainty favor long-term (short-term) suppliers. By examining the two-way interactions of contract factors (price, demand, purchasing bounds, learning and technology effect, salvage values and contract cancellation), both intuitive and non-intuitive managerial insights in outsourcing strategies are derived.

MSC 2000:: *90C15 Stochastic programming
90C39 Dynamic programming

Keywords: supply chain contracts; stochastic dynamic programming; purchasing; supplier selection

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