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Purchasing Raw Material on a Fluctuating Market

Author

Listed:
  • T. Fabian

    (Case Institute of Technology, Cleveland, Ohio)

  • J. L. Fisher

    (Case Institute of Technology, Cleveland, Ohio)

  • M. W. Sasieni

    (Case Institute of Technology, Cleveland, Ohio)

  • A. Yardeni

    (Case Institute of Technology, Cleveland, Ohio)

Abstract

The essential decision problem in buying on a fluctuating market is the timing of the purchases and the decision of how much to purchase when the time arises. This study presents a solution to the problem of determining inventories of raw material when the price of this raw material fluctuates from period to period. The study is presented in two parts Part II develops a formal dynamic-programming model and its analytic solution under the assumptions that the following data are available for decision making: (a) the existing inventory, (b) the current market price, (c) the cost of holding inventory and the cost of shortage, and (d) probability-density functions for future price and demand of the raw material. Part I presents the results of an actual case study that represents a generalization of the model developed in Part II. In the actual case study, not only was information available concerning the probability-density functions for future price, but price forecasts for the next three periods were also available. Because of the difficulty of solving the original dynamic-programming model developed in Part II when the probability-density functions for future price are dependent from period to period, a surrogate model was developed. This surrogate model combines the analytic solution in its original form with a series of simple decision rules which were easily implemented. Percentage cost savings are also presented in Part I.

Suggested Citation

  • T. Fabian & J. L. Fisher & M. W. Sasieni & A. Yardeni, 1959. "Purchasing Raw Material on a Fluctuating Market," Operations Research, INFORMS, vol. 7(1), pages 107-122, February.
    • Handle: RePEc:inm:oropre:v:7:y:1959:i:1:p:107-122
    DOI: 10.1287/opre.7.1.107
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    Citations

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    Cited by:

    1. George Hall and John Rust, Yale University, 2001. "Econometric Methods for Endogenously Sampled Time Series: The Case of Commodity Price Speculation in the Steel Market," Computing in Economics and Finance 2001 274, Society for Computational Economics.
    2. Hall, Joseph M. & Kopalle, Praveen K. & Krishna, Aradhna, 2010. "Retailer Dynamic Pricing and Ordering Decisions: Category Management versus Brand-by-Brand Approaches," Journal of Retailing, Elsevier, vol. 86(2), pages 172-183.
    3. 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.
    4. Arnold, Jan & Minner, Stefan & Eidam, Björn, 2009. "Raw material procurement with fluctuating prices," International Journal of Production Economics, Elsevier, vol. 121(2), pages 353-364, October.
    5. Hall, George & Rust, John, 2021. "Estimation of endogenously sampled time series: The case of commodity price speculation in the steel market," Journal of Econometrics, Elsevier, vol. 222(1), pages 219-243.
    6. Lucy Gongtao Chen & Lawrence W. Robinson & Robin O. Roundy & Rachel Q. Zhang, 2015. "Technical Note—New Sufficient Conditions for ( s, S ) Policies to be Optimal in Systems with Multiple Uncertainties," Operations Research, INFORMS, vol. 63(1), pages 186-197, February.
    7. Liu, Yifeng & Yang, Jian, 2015. "Joint pricing-procurement control under fluctuating raw material costs," International Journal of Production Economics, Elsevier, vol. 168(C), pages 91-104.
    8. Gürel, Yücel & Güllü, Refik, 2019. "Effect of a secondary market on a system with random demand and uncertain costs," International Journal of Production Economics, Elsevier, vol. 209(C), pages 112-120.
    9. Lijo John & Anand Gurumurthy, 2022. "Are quantity flexibility contracts with discounts in the presence of spot market procurement relevant for the humanitarian supply chain? An exploration," Annals of Operations Research, Springer, vol. 315(2), pages 1775-1802, August.
    10. Xiong, Xing & Li, Yanzhi & Yang, Wenguo & Shen, Huaxiao, 2022. "Data-driven robust dual-sourcing inventory management under purchase price and demand uncertainties," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 160(C).
    11. Xiaofeng Nie & Tamer Boyacı & Mehmet Gümüş & Saibal Ray & Dan Zhang, 2017. "Joint procurement and demand-side bidding strategies under price volatility," Annals of Operations Research, Springer, vol. 257(1), pages 121-165, October.

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