Partial Demand Information and Commitment in Dynamic Transportation Procurement

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