Purchase contract management with demand forecast updates

Abstract

We study a two-stage purchase contract with a demand forecast update. The purchase contract provides the buyer an opportunity to adjust an initial commitment based on an updated demand forecast obtained at a later stage. An adjustment, if any, incurs a fixed as well as a variable cost. Using a dynamic programming formulation, we obtain optimal solutions for a class of demand distributions. We also discuss how these results can be applied to gain managerial insights that help in making decisions regarding where to allocate efforts in improving the forecast quality and whether or not to sign a contract. Contributed by the Supply Chains/Production-Inventory Systems Department