Procurement Planning to Maintain Both Short-Term Adaptiveness and Long-Term Perspective

• Authors: Jewel S. Bonser;S. David Wu
• Venue: Management Science
• Year: 2001

We study the fuel procurement problem for electrical utilities under uncertain demand and market price. Long-term contractual supply commitments are made at a set price with fuel suppliers at the beginning of each year. Each month the procurement planner can use fuel from these contracts or purchase fuel at the current market price. Motivated by practical insights from this market, we propose a two-phase dynamic procedure to determine a procurement plan. In the first phase, theminimum contract purchases for each month are determined at the beginning of the year. In the second phase, given theminimum contract purchases, the more detailed procurement decisions are determined at the beginning of each month with the most up-to-date information. We perform intensive computational experiments that show that this procedure produces high-quality solutions comparable to a rolling-horizon stochastic-programming heuristic, is easier to maintain and generalize, is computationally faster, and is robust to random fluctuations in demand requirements, spot market prices, and other sources of uncertainty.