Design of component-supply contract with commitment-revision flexibility

In this paper, we study a type of supply contract that is frequently used in the electronics industry. A common feature of these supply contracts is that at the beginning of the contract, the buyer makes purchasing commitments to the supplier for each period. The buyer may have some flexibility to purchase quantities that actually deviate from the original commitments. Moreover, as time passes and more information about the actual demand is collected, the buyer may update the previous commitments, in a way that is described. We develop a heuristic that is easy to implement and that determines nearly optimal commitments and purchasing quantities. We show that in many cases of practical interest, the heuristic results in solutions that are close to the optimal.