Budget‐constrained high‐quality procurement strategies subject to risk

Abstract

Addresses important logistical considerations in the distribution of a seasonal food product. While most organizations recognize that quality affects both demand and cost, the degree of uncertainty in the distribution channel itself, which impacts quality through management’s efforts to procure adequate stock of product during peak demand, must also be considered. Develops a stochastic dynamic programming formulation from which budget‐constrained order quantities may be determined. Shows that the distribution and timing of orders impacts on quality, which is measured by the shortage probability over the multiple period planning horizon. Provides a numerical example from which optimal solutions are obtained. Provides a basic framework from which decision support tools may be developed to assist in procuring a product in a distribution channel where receipt quantities are probabilistic.