Determining the optimal Buying Strategy
Determining the optimal Buying Strategy
In building up this optimal buying strategy (as also in case of conservative and hindsight buying) the following
assumptions are implicit
1. Time has been divided into successive periods; in this example, weeks.
2 A planning horizon” of N periods is arbitrarily taken. In this example, a storage capacity of 10 periods (weeks) is imposed.
3.Note that even with infinite storage capacity a company cannot have infinite periods.
4.as the knowledge of prices will be diffused after a certain number of periods.
5. Demand is known for all the periods in the planning horizon. In this example, a uniform demand of 100 tons per period is assumed. It can be different for different periods in other situations.
6.No shortages are allowed. Whatever be the price a company has to buy (if it does not have in stock) at least one period’s requirement.
7. No storage cost has been assumed. If, however, the “planning horizons” are longer, the storage cost has to be considered.
8.There is only one price offer in a period. If this opportunity of purchase is foregone, a company has to wait for the next period to purchase its requirements.
9. There are no supply restrictions. Quantities up to the entire requirement of planning horizon” are available in the market during anyone of the periods.
10. The prices fluctuate randomly and are independent of each other, at least during the “planning horizon”.
11. Delivery is assumed to be instantaneous
12. Stock once bought cannot be resold.
It is imperative that a company should hold off when the prices are high and buy when the prices are low.
Such a decision is very much dependent on the stock on hand. If the stock on hand is low, a company might decide to buy even at reasonably high prices and if it is high it might not buy at relatively lower prices. The optimal technique that a company should use is based on the prices of indifference,
i.e., given the stock on hand, there would be a price when the company would be indifferent between buying and holding off.
