Two-Stage Ordering Policy under Buyer’s Minimum-Commitment Quantity Contract

Hsi-Mei Hsu, Zi-Yin Chen

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DOI: 10.4236/ajor.2011.13012                

Abstract

In this paper we consider a two-stage ordering problem with a buyer’s minimum commitment quantity contract. Under the contract the buyer is required to give a minimum-commitment quantity. Then the manufacturer has the obligations to supply the minimum-commitment quantity and to provide a shortage compensation policy to the buyer. We formulate a dynamic optimization model to determine the manufacturer’s two stage order quantities for maximizing the expected profit. The conditions for the existence of the optimal solution are defined. And we also develop a procedure to solve the problem. Numerical examples are given to illustrate the proposed solution procedure and sensitivity analyses are performed to find managerial insights.

Keywords

Two Stages Ordering, Commitment, Bayesian Information Updating

Conflicts of Interest

The authors declare no conflicts of interest.

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