Analysis of Supply Contracts with Commitments and Flexibility
Y. Bassok and R. Anupindi
*** Abstract ****
In this paper we address an important class of supply contracts called
the Rolling Horizon Flexibility (RHF) contracts. Under such a
contract a buyer has to forecast and commit requirements for
components, for each period, at the beginning of the horizon. Usually,
a supplier provides some flexibility to adjust the current order and
future commitments in a limited way in a rolling horizon manner. We
present a general model for the study of RHF contracts. We propose
several heuristics and derive a lower bound. We demonstrate,
numerically, the effectiveness of the heuristics for both stationary
and non--stationary demands. Some of the heuristics are easy to
compute and hence amenable to practical implementation.
We propose two measures for the order process which allow us to (a)
evaluate the effectiveness of RHF contracts in restricting the
variability in the orders, and (b) measure the accuracy of advance
information vis a vis the actual orders. We demonstrate, numerically,
that the order process variability decreases significantly as
flexibilities decrease without significantly increasing the costs to
the buyer. Our numerical studies provide several other managerial
insights for the buyer; e.g., we are able to provide insights into how
much flexibility is sufficient, the value of additional flexibility,
the effect of flexibility on customer satisfaction (as measured by
fill rate), etc.