Design and Evaluation of Long-Term Supply Contracts in the Presence of Spot Market

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We consider a make-to-stock (MTS) manufacturing system that produces a single product that can be sold not only in a spot market but also through a long-term supply contractual channel, such as the OEM contract. A typical example of the spot market is a B2B online commodity market. The price in the spot market is random, and evolves as a continuous-time Markov chain. The demand in the spot market comes in the arrivals of a Markov Modulated Poisson Process (MMPP), and can be rejected or accepted by instant or delayed fulfillment. However, price in the contractual channel is pre-specified and demand in the contractual channel comes at a homogeneous Poisson process with a committed constant arrival rate. The system is obligate to fulfill contract orders. In this setting, the coordination of production and spot sales arises to be a core of decisions and is proven to be optimized by a simple and intuitively structured threshold policy under a long-run average profit criterion. In particular, the optimal policy consists of spot-dependent base-stock and sale admission thresholds. Then, we show how a contract should be evaluated and designed while bargaining with the contractual partner. Finally, we unveil that the manufacturer and the partner can reach an economic Nash equilibrium point to strike a deal. An effective algorithm is proposed for computing optimal threshold control and Nash equilibrium point. (joint work with: Zhan Pang)


  • Workflow Status: Published
  • Created By: Barbara Christopher
  • Created: 10/08/2010
  • Modified By: Fletcher Moore
  • Modified: 10/07/2016


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