A negotiation aid for fixed-quantity contracts with stochastic demand and production

Consider an organization whose capability to produce an item and whose customer demand are both stochastic. In such a context “take-or-pay” contracts can be attractive. Under such a contract the organization agrees to purchase from a supplier a fixed quantity per period over a specified number of periods. Simulation is too slow an analysis approach for the typical dynamic negotiation situation. We use a Markovian approach to create a tool that negotiators can use to evaluate the expected cost of a proposed contract, considering the stochastic demand and all relevant cost components. The approach is fast enough to use in real time, and yields accurate (sometimes exact) results.