IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v57y2011i12p2228-2244.html

Multiechelon Procurement and Distribution Policies for Traded Commodities

Author

Listed:
  • Ankur Goel

    (Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

  • Genaro J. Gutierrez

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

Abstract

We consider a firm that procures and distributes a commodity from spot and forward markets under randomly fluctuating prices; the commodity is distributed downstream to a set of nonhomogeneous retailers to satisfy random demand. We formulate a model that allows one to compute approximate, but near optimal, procurement and distribution policies for this system, and we explore the value of the commodity's market in providing managers with (a) additional flexibility in procurement and (b) information on price dynamics generated through the trading of futures contracts. Our results indicate that the presence of the commodity market and the information that it conveys may lead to significant reductions in inventory-related costs; however, to obtain these benefits, both the spot procurement flexibility and the term structure of prices generated by the commodity market must be incorporated in the formulation of the operating policy. Managerial insights on the procurement strategy as a function of variability in prices and demand are also discussed. This paper was accepted by John Birge, focused issue editor.

Suggested Citation

  • Ankur Goel & Genaro J. Gutierrez, 2011. "Multiechelon Procurement and Distribution Policies for Traded Commodities," Management Science, INFORMS, vol. 57(12), pages 2228-2244, December.
    • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:12:p:2228-2244
    DOI: 10.1287/mnsc.1110.1430
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1110.1430
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.1110.1430?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Felipe Caro & Jérémie Gallien, 2007. "Dynamic Assortment with Demand Learning for Seasonal Consumer Goods," Management Science, INFORMS, vol. 53(2), pages 276-292, February.
    2. Andrew J. Clark & Herbert Scarf, 2004. "Optimal Policies for a Multi-Echelon Inventory Problem," Management Science, INFORMS, vol. 50(12_supple), pages 1782-1790, December.
    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. Eric Logan Huggins & Tava Lennon Olsen, 2003. "Supply Chain Management with Guaranteed Delivery," Management Science, INFORMS, vol. 49(9), pages 1154-1167, September.
    5. Nicola Secomandi, 2010. "On the Pricing of Natural Gas Pipeline Capacity," Manufacturing & Service Operations Management, INFORMS, vol. 12(3), pages 393-408, October.
    6. Gavirneni, Srinagesh & Morton, Thomas E., 1999. "Inventory control under speculation: Myopic heuristics and exact procedures," European Journal of Operational Research, Elsevier, vol. 117(2), pages 211-221, September.
    7. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    8. Daniel J. Graham & Stephen Glaister, 2002. "The Demand for Automobile Fuel: A Survey of Elasticities," Journal of Transport Economics and Policy, University of Bath, vol. 36(1), pages 1-25, January.
    9. George Tagaras & Dimitrios Vlachos, 2001. "A Periodic Review Inventory System with Emergency Replenishments," Management Science, INFORMS, vol. 47(3), pages 415-429, March.
    10. Holbrook Working, 1948. "Theory of the Inverse Carrying Charge in Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 1-28.
    11. Robert S. Pindyck, 2004. "Volatility and commodity price dynamics," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(11), pages 1029-1047, November.
    12. Nesim Erkip & Warren H. Hausman & Steven Nahmias, 1990. "Optimal Centralized Ordering Policies in Multi-Echelon Inventory Systems with Correlated Demands," Management Science, INFORMS, vol. 36(3), pages 381-392, March.
    13. David G. Lawson & Evan L. Porteus, 2000. "Multistage Inventory Management with Expediting," Operations Research, INFORMS, vol. 48(6), pages 878-893, December.
    14. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    15. Yoichiro Fukuda, 1964. "Optimal Policies for the Inventory Problem with Negotiable Leadtime," Management Science, INFORMS, vol. 10(4), pages 690-708, July.
    16. Lingxiu Dong & Hong Liu, 2007. "Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power," Operations Research, INFORMS, vol. 55(1), pages 128-145, February.
    17. Daniel Adelman & Adam J. Mersereau, 2008. "Relaxations of Weakly Coupled Stochastic Dynamic Programs," Operations Research, INFORMS, vol. 56(3), pages 712-727, June.
    18. Awi Federgruen & Paul Zipkin, 1984. "Approximations of Dynamic, Multilocation Production and Inventory Problems," Management Science, INFORMS, vol. 30(1), pages 69-84, January.
    19. Peter Berling & Kaj Rosling, 2005. "The Effects of Financial Risks on Inventory Policy," Management Science, INFORMS, vol. 51(12), pages 1804-1815, December.
    20. Sripad K. Devalkar & Ravi Anupindi & Amitabh Sinha, 2011. "Integrated Optimization of Procurement, Processing, and Trade of Commodities," Operations Research, INFORMS, vol. 59(6), pages 1369-1381, December.
    21. Owen Q. Wu & Hong Chen, 2010. "Optimal Control and Equilibrium Behavior of Production-Inventory Systems," Management Science, INFORMS, vol. 56(8), pages 1362-1379, August.
    22. Ç Haksöz & S Seshadri, 2007. "Supply chain operations in the presence of a spot market: a review with discussion," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(11), pages 1412-1429, November.
    23. Martin I. Reiman & Rodrigo Rubio & Lawrence M. Wein, 1999. "Heavy Traffic Analysis of the Dynamic Stochastic Inventory-Routing Problem," Transportation Science, INFORMS, vol. 33(4), pages 361-380, November.
    24. Nicola Secomandi, 2010. "Optimal Commodity Trading with a Capacitated Storage Asset," Management Science, INFORMS, vol. 56(3), pages 449-467, March.
    25. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    26. Edward J. McGavin & James E. Ward & Leroy B. Schwarz, 1997. "Balancing Retailer Inventories," Operations Research, INFORMS, vol. 45(6), pages 820-830, December.
    27. Guoming Lai & Mulan X. Wang & Sunder Kekre & Alan Scheller-Wolf & Nicola Secomandi, 2011. "Valuation of Storage at a Liquefied Natural Gas Terminal," Operations Research, INFORMS, vol. 59(3), pages 602-616, June.
    28. H. Jönsson & E. A. Silver, 1987. "Analysis of a Two-Echelon Inventory Control System with Complete Redistribution," Management Science, INFORMS, vol. 33(2), pages 215-227, February.
    29. Paul Zipkin, 1984. "On the Imbalance of Inventories in Multi-Echelon Systems," Mathematics of Operations Research, INFORMS, vol. 9(3), pages 402-423, August.
    30. Qi Fu & Chung-Yee Lee & Chung-Piaw Teo, 2010. "Procurement management using option contracts: random spot price and the portfolio effect," IISE Transactions, Taylor & Francis Journals, vol. 42(11), pages 793-811.
    31. Kamal Golabi, 1985. "Optimal Inventory Policies When Ordering Prices are Random," Operations Research, INFORMS, vol. 33(3), pages 575-588, June.
    32. Kamran Moinzadeh & Hau L. Lee, 1989. "Approximate Order Quantities and Reorder Points for Inventory Systems Where Orders Arrive in Two Shipments," Operations Research, INFORMS, vol. 37(2), pages 277-287, April.
    33. Peter L. Jackson, 1988. "Stock Allocation in a Two-Echelon Distribution System Or "What to Do Until Your Ship Comes In"," Management Science, INFORMS, vol. 34(7), pages 880-895, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Güllü, Refik & Erkip, Nesim, 2024. "Risk pooling under demand and price uncertainty," European Journal of Operational Research, Elsevier, vol. 315(1), pages 120-129.
    2. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.
    3. Peter Berling & Victor Martínez-de-Albéniz, 2011. "Optimal Inventory Policies when Purchase Price and Demand Are Stochastic," Operations Research, INFORMS, vol. 59(1), pages 109-124, February.
    4. Johan Marklund & Kaj Rosling, 2012. "Lower Bounds and Heuristics for Supply Chain Stock Allocation," Operations Research, INFORMS, vol. 60(1), pages 92-105, February.
    5. Nicola Secomandi & Guoming Lai & François Margot & Alan Scheller-Wolf & Duane J. Seppi, 2015. "Merchant Commodity Storage and Term-Structure Model Error," Manufacturing & Service Operations Management, INFORMS, vol. 17(3), pages 302-320, July.
    6. Sven Axsäter & Johan Marklund & Edward A. Silver, 2002. "Heuristic Methods for Centralized Control of One-Warehouse, N-Retailer Inventory Systems," Manufacturing & Service Operations Management, INFORMS, vol. 4(1), pages 75-97, October.
    7. Sentao Miao & Stefanus Jasin & Xiuli Chao, 2022. "Asymptotically Optimal Lagrangian Policies for Multi-Warehouse, Multi-Store Systems with Lost Sales," Operations Research, INFORMS, vol. 70(1), pages 141-159, January.
    8. Karl Inderfurth & Peter Kelle & Rainer Kleber, 2014. "The Effect of Material Price and Product Demand Correlations on Combined Sourcing and Inventory Management," FEMM Working Papers 140013, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    9. Karl Inderfurth & Peter Kelle & Rainer Kleber, 2018. "Inventory control in dual sourcing commodity procurement with price correlation," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 26(1), pages 93-119, March.
    10. Svoboda, Josef & Minner, Stefan & Yao, Man, 2021. "Typology and literature review on multiple supplier inventory control models," European Journal of Operational Research, Elsevier, vol. 293(1), pages 1-23.
    11. Sentao Miao & Stefanus Jasin & Xiuli Chao, 2025. "Near-Optimal Mixed ( s,S ) Policy for a Multiwarehouse, Multistore Inventory System with Lost Sales and Fixed Cost," Operations Research, INFORMS, vol. 73(5), pages 2306-2318, September.
    12. Aditya Jain & Harry Groenevelt & Nils Rudi, 2010. "Continuous Review Inventory Model with Dynamic Choice of Two Freight Modes with Fixed Costs," Manufacturing & Service Operations Management, INFORMS, vol. 12(1), pages 120-139, August.
    13. Bollapragada, rinivas & Akella, Ram & Srinivasan, Ramesh, 1998. "Centralized ordering and allocation policies in a two-echelon system with non-identical warehouses," European Journal of Operational Research, Elsevier, vol. 106(1), pages 74-81, April.
    14. de Kok, Ton & Grob, Christopher & Laumanns, Marco & Minner, Stefan & Rambau, Jörg & Schade, Konrad, 2018. "A typology and literature review on stochastic multi-echelon inventory models," European Journal of Operational Research, Elsevier, vol. 269(3), pages 955-983.
    15. Christian Mandl & Stefan Minner, 2023. "Data-Driven Optimization for Commodity Procurement Under Price Uncertainty," Manufacturing & Service Operations Management, INFORMS, vol. 25(2), pages 371-390, March.
    16. Anna Maria Gambaro & Nicola Secomandi, 2021. "A Discussion of Non‐Gaussian Price Processes for Energy and Commodity Operations," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 47-67, January.
    17. Yiran Li & Chaolin Yang, 2025. "Managing the two-echelon distribution systems with dual delivery modes," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 47(3), pages 857-888, September.
    18. Jiao Wang & Lima Zhao & Arnd Huchzermeier, 2021. "Operations‐Finance Interface in Risk Management: Research Evolution and Opportunities," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 355-389, February.
    19. Björn Lutz, 2010. "Pricing of Derivatives on Mean-Reverting Assets," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-02909-7, December.
    20. Canyakmaz, Caner & Özekici, Süleyman & Karaesmen, Fikri, 2019. "An inventory model where customer demand is dependent on a stochastic price process," International Journal of Production Economics, Elsevier, vol. 212(C), pages 139-152.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:57:y:2011:i:12:p:2228-2244. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.