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A procurement model using capacity reservation

Author

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  • Hazra, Jishnu
  • Mahadevan, B.

Abstract

In this paper we model a scenario where a buyer reserves capacity from one or more suppliers in the presence of demand uncertainty. We explicitly derive suppliers' capacity reservation price, which is a function of their capacity, amount of capacity reserved by the buyer and other parameters. The buyer operates in a "built-to-order" environment and needs to decide how much capacity to reserve and from how many suppliers. For a strategy of equal allocation of capacity among the selected suppliers we develop closed form solutions and show that the model is robust to the number of suppliers from whom capacity is procured through reservation. When the parameters of demand distribution changes the supply base is likely to remain more or less the same. Our analysis further shows that increasing the number of pre-qualified suppliers does not provide significant advantages to the buyer. On the other hand, a pre-qualified supply base with greater capacity heterogeneity will benefit the buyer.

Suggested Citation

  • Hazra, Jishnu & Mahadevan, B., 2009. "A procurement model using capacity reservation," European Journal of Operational Research, Elsevier, vol. 193(1), pages 303-316, February.
  • Handle: RePEc:eee:ejores:v:193:y:2009:i:1:p:303-316
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    References listed on IDEAS

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    1. Serel, Dogan A. & Dada, Maqbool & Moskowitz, Herbert, 2001. "Sourcing decisions with capacity reservation contracts," European Journal of Operational Research, Elsevier, vol. 131(3), pages 635-648, June.
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    Citations

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    Cited by:

    1. Inderfurth, Karl & Kelle, Peter & Kleber, Rainer, 2013. "Dual sourcing using capacity reservation and spot market: Optimal procurement policy and heuristic parameter determination," European Journal of Operational Research, Elsevier, vol. 225(2), pages 298-309.
    2. Li, Ying & Gupta, Sudheer, 2011. "Strategic capability investments and competition for supply contracts," European Journal of Operational Research, Elsevier, vol. 214(2), pages 273-283, October.
    3. Chen, Kebing, 2012. "Procurement strategies and coordination mechanism of the supply chain with one manufacturer and multiple suppliers," International Journal of Production Economics, Elsevier, vol. 138(1), pages 125-135.
    4. Akbalik, Ayse & Hadj-Alouane, Atidel B. & Sauer, Nathalie & Ghribi, Houcem, 2017. "NP-hard and polynomial cases for the single-item lot sizing problem with batch ordering under capacity reservation contract," European Journal of Operational Research, Elsevier, vol. 257(2), pages 483-493.
    5. Zhao, Yingxue & Ma, Lijun & Xie, Gang & Cheng, T.C.E., 2013. "Coordination of supply chains with bidirectional option contracts," European Journal of Operational Research, Elsevier, vol. 229(2), pages 375-381.
    6. Y. Boulaksil & J. C. Fransoo & T. Tan, 0. "Capacity reservation and utilization for a manufacturer with uncertain capacity and demand," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 0, pages 1-21.
    7. Jörnsten, Kurt & Lise Nonås, Sigrid & Sandal, Leif & Ubøe, Jan, 2013. "Mixed contracts for the newsvendor problem with real options and discrete demand," Omega, Elsevier, vol. 41(5), pages 809-819.
    8. repec:spr:orspec:v:39:y:2017:i:3:d:10.1007_s00291-016-0471-x is not listed on IDEAS
    9. Tan, Tarkan & Alp, Osman, 2016. "Optimal sourcing from alternative capacitated suppliers with general cost structures," Omega, Elsevier, vol. 58(C), pages 26-32.
    10. Jain, Tarun & Hazra, Jishnu, 2017. "Dual sourcing under suppliers' capacity investments," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 103-115.
    11. Mahadevan, B. & Hazra, Jishnu & Jain, Tarun, 2017. "Services outsourcing under asymmetric cost information," European Journal of Operational Research, Elsevier, vol. 257(2), pages 456-467.
    12. 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.

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