Data-driven analysis on optimal purchasing decisions in combined procurement

Abstract

With the development of information technology, big data analysis has been highlighted in operations and management. From this viewpoint, this paper studies a buyer's optimal purchasing decisions in combined procurement. For combined procurement, a buyer first signs a long-term contract with a supplier to guarantee a certain level of commodity supply, and can then replenish the commodities from the spot market if necessary. The optimal purchasing quantity in the long-term contract is examined to maximise the buyer's expected profit from combined procurement. In view of the imperfectness in the spot market, the spot trading liquidity is considered in the buyer's optimal purchasing decision. The properties of the two optimal purchasing quantities are examined and several interesting results are obtained. For example, it is illustrated that a buyer's expected profit may decrease in the spot capacity, a result that has never appeared in the existing literature, which reveals the importance of a buyer's optimal order decision in the presence of spot replenishment. Numerical results and sensitivity analysis are performed to verify the results. Management insights are suggested for a buyer's optimal purchasing decisions in combined procurement with a long-term contract and spot replenishment.

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