Dynamic pricing and inventory management under fluctuating procurement costs

Guang Xiao, Nan Yang, Renyu Zhang

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

We consider a periodic review joint pricing and inventory control model in which a firm faces both stochastic demand and fluctuating procurement costs. To address procurement cost fluctuation, the firm adopts a dual-sourcing strategy, under which it procures from a spot market with immediate delivery and through a forward-buying contract with postponed delivery. Our analysis offers the unique insight that a risk-neutral firm may earn higher expected profit under a more volatile procurement cost process. This is because the firm makes its pricing and sourcing decisions in response to the realized cost in each period. Moreover, we characterize how the firm should dynamically adjust its pricing and sourcing decisions in accordance to cost evolution. For example, if sourcing through the forward-buying contract is less expensive than sourcing directly from the spot market, the optimal safety stock is decreasing in the current spot market purchasing cost. However, the optimal order quantity through the forward-buying contract is, in general, not monotone in the current spot-purchasing cost. Finally, we conduct extensive numerical experiments to show that dynamic pricing and dual sourcing may be either strategic complements or substitutes in the presence of fluctuating procurement costs and uncertain demand. This is because dynamic pricing mitigates demand uncertainty risk and exploits procurement cost fluctuation, whereas dual sourcing may either intensify or dampen demand risk.

Original languageEnglish (US)
Pages (from-to)321-334
Number of pages14
JournalManufacturing and Service Operations Management
Volume17
Issue number3
DOIs
StatePublished - Jun 1 2015

Keywords

  • Dual sourcing
  • Fluctuating procurement cost
  • Joint pricing and inventory management

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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