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A negotiation aid for fixed-quantity contracts with stochastic demand and production

Authors
Journal
International Journal of Production Economics
0925-5273
Publisher
Elsevier
Publication Date
Volume
66
Issue
1
Identifiers
DOI: 10.1016/s0925-5273(99)00107-3
Keywords
  • Purchasing
  • Markov Models
  • Contracting
  • Negotiation
Disciplines
  • Mathematics

Abstract

Abstract Consider an organization whose capability to produce an item and whose customer demand are both stochastic. In such a context “take-or-pay” contracts can be attractive. Under such a contract the organization agrees to purchase from a supplier a fixed quantity per period over a specified number of periods. Simulation is too slow an analysis approach for the typical dynamic negotiation situation. We use a Markovian approach to create a tool that negotiators can use to evaluate the expected cost of a proposed contract, considering the stochastic demand and all relevant cost components. The approach is fast enough to use in real time, and yields accurate (sometimes exact) results.

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