Sourcing decisions with capacity reservation contracts

Dogan A. Serel, Maqbool Dada, Herbert Moskowitz

Research output: Contribution to journalArticlepeer-review

Abstract

By committing to long-term supply contracts, buyers seek to lower their purchasing costs, and have products delivered without interruption. When a long-term contract is available, suppliers are less pressured to find new customers, and can afford to charge a price lower than the prevailing spot market price. We examine sourcing decisions of a firm in the presence of a capacity reservation contract that this firm makes with its long-term supplier in addition to the spot market alternative. This contract entails delivery of any desired portion of a reserved fixed capacity in exchange for a guaranteed payment by the buyer. We investigate rational actions of the two parties under two different types of periodic review inventory control policies used by the buyer: the two-number policy, and the base stock policy. When typical demand probability distributions are considered, inclusion of the spot market source in the buyer's procurement plan significantly reduces the capacity commitments from the long-term supplier.

Original languageEnglish (US)
Pages (from-to)635-648
Number of pages14
JournalEuropean Journal of Operational Research
Volume131
Issue number3
DOIs
StatePublished - Jun 16 2001
Externally publishedYes

Keywords

  • Capacity reservation
  • Inventory
  • Long-term contracts
  • Supply chain management

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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