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Dual sourcing using capacity reservation and spot market: Optimal procurement policy and heuristic parameter determination

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  • Inderfurth, Karl
  • Kelle, Peter
  • Kleber, Rainer
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    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. Exploiting these structural properties, an advanced heuristic is developed to determine the respective policy parameters. This heuristic is compared with two rolling-horizon approaches which use the one-period and two-period optimal solution. A comprehensive numerical study reveals that the approaches based on one-period and two-period solutions have considerable drawbacks, while the advanced heuristic performs very well compared to the optimal solution. Finally, by exploiting our numerical results we give some insights into the system’s behavior under problem parameter variations.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 225 (2013)
    Issue (Month): 2 ()
    Pages: 298-309

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    Handle: RePEc:eee:ejores:v:225:y:2013:i:2:p:298-309

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Dual sourcing; Capacity reservation; Spot market; Procurement policy; Stochastic dynamic programming; Heuristics;

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    Cited by:
    1. Wu, Xiaole & Kouvelis, Panos & Matsuo, Hirofumi & Sano, Hiroki, 2014. "Horizontal coordinating contracts in the semiconductor industry," European Journal of Operational Research, Elsevier, vol. 237(3), pages 887-897.
    2. 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.
    3. Densing, M., 2013. "Dispatch planning using newsvendor dual problems and occupation times: Application to hydropower," European Journal of Operational Research, Elsevier, vol. 228(2), pages 321-330.

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