Combined sourcing and inventory management using capacity reservation and spot market

Leading companies in several industries purchase materials with the combined use of capacity reservation contracts and spot market. We analyse the optimal and a simplified policy for making long-term capacity reservation and periodic ordering/inventory decisions using the above two sources under stochastic demand and random spot market price fluctuations. In a numerical study we assess the effects of demand and spot market price uncertainties and of other parameters on both the optimal and simplified policy. We provide insights into the interaction of capacity reservation decision, demand uncertainty induced safety inventory, and inventory resulting from forward buying on the spot market