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Selection of contract suppliers under price and demand uncertainty in a dynamic market

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  • Li, Shanling
  • Murat, Alper
  • Huang, Wanzhen

Abstract

In this paper, 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.

Suggested Citation

  • Li, Shanling & Murat, Alper & Huang, Wanzhen, 2009. "Selection of contract suppliers under price and demand uncertainty in a dynamic market," European Journal of Operational Research, Elsevier, vol. 198(3), pages 830-847, November.
    • Handle: RePEc:eee:ejores:v:198:y:2009:i:3:p:830-847
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    References listed on IDEAS

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    1. Wanzhen Huang & Shanling Li & Devanath Tirupati, 2003. "Selection Of Suppliers Considering The Learning Effect And Technology Improvement," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 71-92.
    2. Bryan R. Routledge & Duane J. Seppi & Chester S. Spatt, 2000. "Equilibrium Forward Curves for Commodities," Journal of Finance, American Finance Association, vol. 55(3), pages 1297-1338, June.
    3. Seifert, Ralf W. & Thonemann, Ulrich W. & Hausman, Warren H., 2004. "Optimal procurement strategies for online spot markets," European Journal of Operational Research, Elsevier, vol. 152(3), pages 781-799, February.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    6. Chambers, Marcus J & Bailey, Roy E, 1996. "A Theory of Commodity Price Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 924-957, October.
    7. Tibben-Lembke, Ronald S., 2004. "N-period contracts with ordering constraints and total minimum commitments: Optimal and heuristic solutions," European Journal of Operational Research, Elsevier, vol. 156(2), pages 353-374, July.
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