Multi-period supplier selection under price uncertainty

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.

Optimization of Multi-Period Rail Procurement Plan

“…In supplier selection literature, the discounts are commonly calculated on the basis of the nature of business done with each buyer. Among these studies, some consider the uncertainties in demands and supplies ( 7, 8 ), others consider the uncertainties in exchange rate of currencies ( 9, 10 ), and still others consider the uncertainties in price breaks ( 11, 12 ) or multi-period decisions ( 13, 14 ). However, none of these models can consider uncertainties in global steel price, exchange rate of currencies, price break of suppliers, as well as multi-period decisions simultaneously.…”