Improved Forward Buying of Commodity Materials

This research presents the Enhanced Commodity Forward Buy (ECFB) heuristic, a new method for commodity purchasing, which allows strategic forward buying of commodities for products that include commodity components or materials. The ECFB addresses limitations of existing methods by considering stochastic demand and stochastic commodity prices for products that contain both commodity and non-commodity materials. We conduct a simulation test of the new heuristic on 10 commodity indices using actual historical market prices, over a range of holding costs, markup margins, commodity percentages of the product’s cost of goods sold and demand distributions. The results of the simulation show that compared with five other buying methods, the ECFB heuristic’s ability to adapt to variations in both demand and commodity prices allows it to generate higher profits when demand is uncertain and commodity prices are volatile.