Partial Demand Information and Commitment in Dynamic Transportation Procurement

45 Pages Posted: 26 Nov 2018

See all articles by Pol Boada-Collado

Pol Boada-Collado

Northwestern University - Department of Industrial Engineering and Management Sciences

Sunil Chopra

Northwestern University - Kellogg School of Management

Karen Smilowitz

Northwestern University - Department of Industrial Engineering and Management Sciences

Date Written: April 6, 2020

Abstract

This paper analyzes a decision process of planning transportation procurement for a distribution lane given limited information regarding future demand for transportation services and a specified commitment horizon for procurement contracts. In contrast to variants in which either full demand information or no demand information is known over the planning horizon, our work considers the value of demand visibility for a short horizon in the future; i.e. the value of partial information. Our work also considers a commitment horizon that is much shorter than the planning horizon. We show the availability of partial information fundamentally changes the contracting policies in the presence of such commitment horizons and, if used optimally, this information can be highly valuable. Partial visibility of demand can increase the willingness of the decision maker to commit to contracts and expand the range of capacity levels selected in settings where the capacity level of a contract is a decision variable. We also identify settings in which the value of partial information is negligible, reducing the incentive of managers to acquire additional demand information for future periods. Finally, we show that with seasonal demand, information is leveraged by properly coordinating with expected demand shocks (e.g. Black Friday) using tailored strategies.

Keywords: transportation procurement, commitment, value of information, capacity management, procurement contracts, dynamic decision processes

Suggested Citation

Boada-Collado, Pol and Chopra, Sunil and Smilowitz, Karen, Partial Demand Information and Commitment in Dynamic Transportation Procurement (April 6, 2020). Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.3271689

Pol Boada-Collado (Contact Author)

Northwestern University - Department of Industrial Engineering and Management Sciences ( email )

2145 Sheridan Road
Room C210
Evanston, IL 60208
United States

Sunil Chopra

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Karen Smilowitz

Northwestern University - Department of Industrial Engineering and Management Sciences ( email )

Evanston, IL 60208-3119
United States

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