Quantity Flexibility Contracts: Optimal Decisions with Information Updates

Abstract

We study single and multiperiod quantity flexibility contracts involving one demand forecast update in each period and a spot market. We obtain the optimal order quantity at the beginning of a period and order quantities on contract and from the spot market at the then prevailing price after the forecast revision and before the demand materialization. The amount that can be purchased on contract is bounded by a given flexibility limit. We discuss the impact of the forecast quality and the level of flexibility on the optimal decisions and managerial insights behind the results.

Keywords: Dynamic Programming, Forecast Updates, Stochastic Ordering, Supply Chain Management, and Supply Contracts.