Raw material procurement with fluctuating prices
Increasing global competition and cost pressure force enterprises and supply chains to discover undetected cost-saving potentials. In particular, interfaces to the raw materials' market are a promising field for improvement. This paper presents a deterministic optimal control approach optimizing the procurement and inventory policy of an enterprise that is processing a raw material when the purchasing price, holding cost, and the demand rate fluctuate over time. Applying Pontryagin's maximum principle, the optimal policy turns out to be of a bang-bang type involving impulse and just-in-time procurement. Numerical examples illustrate the solutions obtained and compare the optimal policy with simple replenishment strategies.
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- Luhmer, Alfred, 1986. "A continuous time, deterministic, nonstationary model of economic ordering," European Journal of Operational Research, Elsevier, vol. 24(1), pages 123-135, January.
- Sarker, Bhaba R. & Al Kindi, Mahmood, 2006. "Optimal ordering policies in response to a discount offer," International Journal of Production Economics, Elsevier, vol. 100(2), pages 195-211, April.
- Robert W. Grubbström & Brian G. Kingsman, 2004. "Ordering and Inventory Policies for Step Changes in the Unit Item Cost: A Discounted Cash Flow Approach," Management Science, INFORMS, vol. 50(2), pages 253-267, February.
- Sarker, Bhaba R. & Al Kindi, Mahmood, 2006. "Erratum to "Optimal ordering policies in response to discount offer" [International Journal of Production Economics 100 (2006) 195-211]," International Journal of Production Economics, Elsevier, vol. 103(2), pages 895-895, October.
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