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Manufacturers whose products primarily relay on expensive raw materials need to make well informed procurement decisions in order to reduce their production costs. Decision making is especially difficult when there is uncertainty about the raw material cost as well as the product demand. This research considers an optimum procurement and production planning problem under uncertainty. Basic raw material is a rare metal with a dynamically and stochastically changing price. The manufacturer has the dual sourcing option: buy from the spot market; or to sign long term contracts. Long term contracts can be signed only at the beginning of every year with a yearly duration. In addition, the contract price depends on the average spot price during some interval. We first consider a simplified version of the problem without long-term contract, and assume a base-stock procurement and inventory control policy. We model the problem as a Markov chain and present some numerical examples demonstrating the effect of various parameters on the optimum base-stock value. Then, we investigate a case with dual procurement option, and present our results.

Optimal Procurement Policy For Cost Conscious Retailer