Quantity Flexibility Contracts: Optimal Decisions with Information Updates

Decision Sciences, Vol., 35, No. 4, pp. 691-712, Fall 2004

23 Pages Posted: 10 Apr 2008 Last revised: 3 Feb 2018

See all articles by Suresh Sethi

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management

Hanqin Zhang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences

Date Written: 2004

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.

Suggested Citation

Sethi, Suresh and Yan, Houmin and Zhang, Hanqin, Quantity Flexibility Contracts: Optimal Decisions with Information Updates (2004). Decision Sciences, Vol., 35, No. 4, pp. 691-712, Fall 2004. Available at SSRN: https://ssrn.com/abstract=1118354

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management ( email )

Shatin, New Territories
Hong Kong

Hanqin Zhang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences ( email )

Zhong-Guan-Cun-Dong-Lu 55, Haidian District
Beijing, Beijing 100080
China

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