Multi-period supplier selection under price uncertainty

Alper Sen, Hande Yaman, Kemal Guler and Evren Korpeoglu
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Alper Sen: Bilkent University, Ankara, Turkey
Hande Yaman: Bilkent University, Ankara, Turkey
Kemal Guler: Hewlett-Packard Laboratories, Palo Alto, USA
Evren Korpeoglu: Hewlett-Packard Laboratories, Palo Alto, USA

Journal of the Operational Research Society, 2014, vol. 65, issue 11, 1636-1648

Abstract: We consider a problem faced by a procurement manager who needs to purchase a large volume of multiple items over multiple periods from multiple suppliers that provide base prices and discounts. Discounts are contingent on meeting various conditions on total volume or spend, and some are tied to future realizations of random events that can be mutually verified. We formulate a scenario-based multi-stage stochastic optimization model that allows us to consider random events such as a drop in price because of the most favoured customer clauses, a price change in the spot market or a new discount offer. We propose certainty-equivalent heuristics and evaluate the regret of using them. We use our model for three bidding events of a large manufacturing company. The results show that considering most favored customer clauses in supplier offers may create substantial savings that may surpass the savings from regular discount offers.

Date: 2014
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