Computers & Industrial Engineering 127 (2019) 709–721

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Computers & Industrial Engineering

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Materials procurement and reserves policies for humanitarian logistics with T

recycling and replenishment mechanisms
Lin Zhanga,b, Jun Tiana, Richard Y.K. Fungb, , Chuangyin Dangb
⁎

a
School of Management, Xi’an Jiaotong University, Xi’an, Shaanxi 710049, China
b
Department of Systems Engineering and Engineering Management, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong Kong

ARTICLE INFO ABSTRACT

Keywords: Physical reserves, being one of the most important resources in humanitarian rescue operations, should ideally
Humanitarian logistics be in adequate quantity and in good quality to meet sudden-onset demands. However, given the uncertainties in
Recycling and replenishment mechanisms demand quantity and timing, reserves (i.e., medicines, drugs, compressed food) can expire if they are not used in
Commitment contract a timely manner, resulting in a huge wastage or the expired reserves being consumed. Considering factors of
Payment strategy
uncertain demand, resource wastage and cost efficiency together, this paper focuses on procurement and re-
serves cooperation between a given government authority and a strategic supplier in a framework of quantity
commitment contract. Under some plausible assumptions, the optimal recycling and replenishment policies, and
the government’s optimal payment strategies are formulated. Through a numerical example and sensitivity
analyses, the practical applicability of the proposed model to the procurement and reserves management for
humanitarian logistics, underlining managerial insights, is examined. Specially, this paper suggests that the
government should actively cooperate with suppliers to co-reserve perishable or consumable materials, and give
priority to suppliers whose operational costs are low and market shares are big. Moreover, factors, including
materials’ shelf-life, customers’ perception and consumption rate, etc., should be carefully evaluated when the
government selects perishable materials as reserves and corresponding suppliers as partners.

1. Introduction
1.1. Background
Relief materials for humanitarian purposes including food, medi-
cines and rescue equipment, etc. are among typical supplies to meet
emergency needs. Adequate reserves are essential to cope with high
demand, especially in the event of sudden-onset disasters, such as
earthquakes, floods, volcanic eruptions. Notably, a hidden requirement
is the provided reserves are in good quality. If not, the basic needs of
people may not be met from the ineffective response, then loss of life
and further human suffering may occur (Duran, Gutierrez, &
Keskinocak, 2011). For instance, in 2005, survivors in an earthquake in
Indonesia claimed that they received expired canned food and got sick
after consumption (https://reliefweb.int/report/indonesia/iom-denies-
sent-poisoned-foods-nias-indonesia). Resource wastage and economic
losses are also inevitable outcomes from poor management of reserved
materials. For example, Sinograin, which manages China’s grain re-
serves and relief supplies, reported huge amount of inedible grains
(https://af.reuters.com/article/commoditiesNews/
idAFL4N0XH17Q20150420). More seriously, these grains could not
serve their primary aims, such as meeting emergency relief demands
caused by disasters and incidents. Once demand occurs, unavailable
reserves would delay the rescue operations. Generally, guaranteeing the
availability is as important to humanitarian rescue as guaranteeing the
quantity.
In contrast, being classified as unlikely future events in commercial
supply chains, from a humanitarian perspective, disruptions are often
considered as inevitable and need to be tackled (Kovács and Tatham,
2009). Prepositioning of relief supplies/proactive procurement and
reactive procurement are two common methods for meeting the po-
tential emergency demand. The former can improve disaster response
(Harke & de Leeuw, 2015), since the items can be quickly accessible
(Richardson, de Leeuw, & Dullaert, 2016) and then the response time
decreases (Rabbani, Manavizadeh, Samavati, & Jalali, 2015). While the
latter can reduce the costs and risks of surplus and low salvage value,
but at the expense of a high cost and a risk of real-time acquisition
(from both logistical and social viewpoints) (Torabi, Shokr, Tofighi, &

Corresponding author.
⁎

E-mail addresses: lzhang439-c@my.cityu.edu.hk (L. Zhang), tianjun@xjtu.edu.cn (J. Tian), richard.fung@cityu.edu.hk (R.Y.K. Fung),
mecdang@cityu.edu.hk (C. Dang).

https://doi.org/10.1016/j.cie.2018.11.013
Received 24 October 2017; Received in revised form 30 October 2018; Accepted 7 November 2018
Available online 10 November 2018
0360-8352/ © 2018 Elsevier Ltd. All rights reserved.
L. Zhang et al.
Heydari, 2018). Amidst various targets and constraints, such as quick
response, adequate supplies, and cost efficiency, governments/non-
profit organizations (NPOs) normally combine these two kinds of pro-
curement methods; keep a certain level of inventory themselves and
cooperate with suppliers, where contracts or framework agreements are
commonly used or designed to achieve the cooperation (see Liang,
Wang, & Gao, 2012; Wang, Li, Liang, Huang, & Ashley, 2015; Chen,
Liang, & Yao, 2017; Torabi et al., 2018; among others).
In practice, it is not easy to establish contractual cooperation in
humanitarian reliefs as that in commercial situation, owing to the un-
ique characteristics of the subject domain (Balcik, Beamon, Krejci,
Muramatsu, & Ramirez, 2010; Balcik, Bozkir, & Kundakcioglu, 2016;
Beamon, 2004; Kovács and Spens, 2009; Whybark, Melnyk, Day, &
Davis, 2010) and the differences between humanitarian supply chains
and commercial supply chains (Beamon & Balcik, 2008; Grass &
Fischer, 2016; Van Wassenhove, 2006; Whybark, 2007). Among many
factors, the most important one is the inherent uncertainties involved in
demand, including the timing, quantity, patterns, etc. This is also one of
the most possible reasons why research on long-term strategic co-
operation for humanitarian purpose tends to be relatively few and far
between. From an economic point of view, a long-term relationship
with a strategic supplier can save cost and reduce cost uncertainties
(Peleg, Lee, & Hausman, 2002). In terms of social welfare, when
emergency demands arise, the supplies from nearby regions can meet
the urgent needs with the shortest possible response time, if the reserves
have been well pre-positioned. For government authorities and also
some NPOs, relief operations are ongoing tasks. Establishing a long-
term strategic cooperation with suppliers in nearby regions is essential
for improving rescue efficiency and effectiveness.
1.2. Problem statement
When the products are consumable/perishable, the government/
NPOs are more likely to cooperate with suppliers due to the risk of
storing reserves (Chen et al., 2017), where the availability of those
products, such as food, bottled water and medicine, should be given
great attentions. This is because they will become wasted unless being
used before their expiry time, however the uncertainty in the occur-
rence of disastrous events requires that all essential items should be
stored in inventory (Yadavalli, Sundar, & Udayabaskaran, 2015). Then,
guaranteeing the availability will naturally become difficult when a
huge amount of perishable materials are reserved for meeting potential
demands caused by high-impact but low-frequency disasters.
Other than the materials that are pre-procured and stored in the
government’s warehouses, the cooperative suppliers also have to ensure
that some reserves are in place, as mentioned in the agreement relief
storage policies (Chen et al., 2017) and the framework of quantity
flexibility contracts (Torabi et al., 2018). Thus, both the government
and the suppliers should adopt proper recycling and replenishment (R&
R, hereafter) strategies to reduce product depreciation, resource wa-
stage and economic loss when endeavouring to guarantee the avail-
ability of perishable products. Furthermore, in order to appeal suppliers
to cooperate, the government who has the primary stake in the hu-
manitarian rescue has to develop appropriate payment strategies. At the
same time, holding a certain amount of physical reserves, the govern-
ment’s own R&R strategies will also impact its payment decisions and
costs incurred. In general, this paper attempts to tackle a procurement
and reserves cooperation problem, where the government should bal-
ance social welfare against cost efficiency when cooperating with sup-
pliers. Specifically, with a long-term strategic cooperation, participants’
R&R policies should be set first for social welfare and then cost effi-
ciency, under which the government’s payment strategies are designed.
1.3. Aim and adopted methodology
No doubt, social welfare is the primary aim for humanitarian
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Computers & Industrial Engineering 127 (2019) 709–721
logistics, but a well-designed cooperation with suppliers is helpful for
the government to guarantee the availability of perishable materials
and to reduce costs. Furthermore, given high uncertain demand and
large quantity of reserved materials, the government has to carefully
select strategic suppliers, with the impacts of some vital factors on the
cooperation duly analysed and evaluated. This study proposes an in-
novative approach of government-supplier cooperation with R&R me-
chanisms in a contractual framework in order to obtain analytical re-
sults that can suggest structures of the optimal decisions.
Given the factors, such as materials’ shelf-life, emergency demand
and reserves distribution, a quantity commitment contract is designed
to analytically support the framework. The government’s optimal
strategies are generated, assuming suppliers are willing to take part in
the cooperation when making the optimal decisions. Under certain
plausible assumptions, this paper suggests some possible recycling, re-
plenishment and payment strategies, and correspondingly discusses
properties of those strategies. Then, a simple and easy-going calculation
procedure is introduced to generate optimal decisions. Managerial in-
sights are put forward based on the properties of optimal decisions and
sensitivity analyses of several input factors.
The rest of this paper is organized as follows. Section 2 reviews the
most relevant literature. In Section 3, primary description with as-
sumptions and notations are introduced. Mathematical models and
analyses, decision-making procedures and a simple numerical example
are presented in Section 4. Section 5 focuses on sensitivity analyses and
the resulting managerial insights. Section 6 concludes the work and
explores future research directions, while important proofs are given in
the Appendix A.
2. Literature review
Given the necessity and benefits of cooperating with suppliers, this
paper especially attempts to study the question of developing a long-
term contractual relationship between the government and its strategic
suppliers to co-reserve physical materials for humanitarian means.
Furthermore, considering the perishability or fixed shelf-life of reserved
materials, a concomitant research issue is to adopt the R&R strategies
which characterize the materials’ shelf-life in the long-term inventory
management. In order to answer these two questions, this section fo-
cuses on reviewing the literature on procurement contracts for physical
reserves and inventory management of perishable products.
Specifically, for each branch, relevant research in humanitarian logis-
tics is reviewed with the research gap discussed. Methods and techni-
ques that can be adopted from the commercial background are then
considered for possible contributions to this paper.
2.1. Procurement contract for physical reserves
Many studies have discussed on the possibility and benefits of ap-
plying existing models in commercial supply chains, and their relative
techniques in humanitarian logistics (Amiri, Jabalameli, Mirzapour, &
Hashem, 2013; David Swanson & Smith, 2013; Day, Melnyk, Larson,
Davis, & Whybark, 2012; Egan, 2010; Van Wassenhove & Pedraza
Martinez, 2012), where one branch of relevant adoption is procurement
contract. However, although a fair amount of literature is available in
the areas of design of procurement contracts in the context of com-
mercial supply chains, only a few can be found on humanitarian lo-
gistics (Nikkhoo, Bozorgi-Amiri, & Heydari, 2018). Table 1 summarizes
the relevant research on procurement contracts for physical reserves in
humanitarian background mainly based on mathematical modelling.
Research on mathematically designing procurement contracts (or
framework agreements) is attracting the attention of scholars, espe-
cially in the past three years. Quantity flexibility contract, option
contract and agreement relief storage policy are the top three popular
forms that are formulated to achieve cooperation between government
(or NPO) and suppliers in order to meet the potential emergency
L. Zhang et al. Computers & Industrial Engineering 127 (2019) 709–721

Table 1
Summary of research on procurement contract for physical reserves in humanitarian background.
Cooperation form Author (Year) Model settings Disaster times

Option contact Liang et al. (2012)
Wang et al. (2015)
Shamsi, Torabi, and
Shakouri, (2018)
An option contract pricing model with two steps delivery process in a single-buyer, single- Single
supplier relief material supply chain
A pre-purchasing with an option contract model in a single-purchaser, single-supplier relief Single
supply chain
A specific option contract for proactively provisioning required vaccine doses from two Single
suppliers (a main and a backup) with aiming to minimize the procurement and social costs
using the SIR epidemic model

Agreement relief storage Chen et al. (2017) A two-stage delivery process model to determine the optimal pre-positioning inventory when Multiple
policy incorporating social donation and emergency spot purchasing
Chen et al. (2018) A multiple relief materials’ storage model to determine the optimal pre-positioning Multiple
inventories when incorporating social donation and emergency spot purchasing

Quantity flexibility contract
Balcik and Ak (2014)
Zhang, Tian, Yang, and Feng,
(2016)
Torabi et al. (2018)
Nikkhoo et al. (2018)
A scenario-based stochastic programming model that selects framework suppliers to minimize Aggregated as one
expected procurement and agreement costs while meeting service requirements
An emergency supplies joint reserves cooperation between a single government and a single Single
supplier through combining conventional procurement and flexible procurement
A novel two-stage scenario-based mixed fuzzy-stochastic programming model for integrated Single
relief pre-positioning and procurement planning in a multi-supplier network
A coordination model for procurement and purchase of relief terms in a three-echelon supply Single
chain with one supplier, a NGO and affected areas

Others Chakravarty (2014a)
Wang et al. (2016)
Zhang, Sun, Zhu, Li, and
Miao, (2017)
A 2-stage proactive/reactive approach to achieve optimal mix of prepositioned and real-time Single
inventory in a retailer-relief provider-logistics service provider framework
A modified newsvendor model under various combinations of service provider method Single
(insourcing/outsourcing approach) and response method (reactive/proactive response)
A joint reserves model that determines the framework suppliers, corresponding optimal Single
commitment quantity and the pre-disaster amount of reserves that are stored in the
government’s emergency material warehouse

demands. Apart from the simplest one-buyer-one-seller framework,
many complex frameworks that covering multiple suppliers, multiple
products or other participants (e.g., service provider) have been ana-
lysed, as shown in Table 1. While most existing studies assume that
there is at most one disaster in the cooperation horizon. More specifi-
cally, even if many disasters might happen in the horizon, they are
aggregated as one (Balcik & Ak, 2014) or the sum of disaster occurrence
probabilities is no more than one (Chen et al., 2017, 2018). In other
words, the time dimension or long-term cooperation for meeting mul-
tiple potential disasters is never explored.
Generally, for emergency relief, contracts must reflect the un-
certainties of disasters, where buyer may insist that they should be able
to change the order quantity, if needed (Chakravarty, 2014b). This is
one inherent reason why flexible contracts, e.g. quantity flexibility
contract and option contract, that are most commonly used in a hu-
manitarian background. Hence, considering long-term strategic co-
operation, this paper focuses on a much more flexible and compre-
hensive mode by proposing a modified quantity commitment contract
approach. From the viewpoints of meeting uncertain demands and
sharing risks with characterizing commitments and flexibilities, the use
of quantity commitment contract is similar to quantity flexibility con-
tract, but it works more naturally and often under multi-period settings.
Research on quantity commitment contract can be found in Anupindi
and Bassok (1999), Urban (2000), Tibben-Lembke (2004), Hsu and
Chen (2012), Wang, Gong, and Zhou, (2017), and Cheng, Yang, and
Tsay, (2017).
2.2. Inventory management of perishable products
With pre-disaster inventory management, there is a huge research
gap for exploring appropriate inventory policies for perishable relief
items (Rabbani et al., 2015), where only a few research emerges re-
cently. Ozguven and Ozbay (2013) propose a comprehensive metho-
dology for the development of a humanitarian emergency management
framework based on real-time tracking of emergency supplies and de-
mands through the use of RFID technology integrated with a multi-
commodity stochastic humanitarian inventory management model.
Saputra, Pots, de Smidt-Destombes, and de Leeuw, (2015) analyse two
end-of-shelf-life policies (e.g., donation and disposal), treating the
Mean Time Between Disasters as a vital decision factor. Rabbani et al.
(2015) incorporate inventory policies of perishable goods into the
preposition planning considering the costs resulting from periodical
replenishments. Yadavalli et al. (2015) propose a continuous review
two substitutable perishable product disaster inventory models and
adopt an adjustable joint reordering policy for replenishment in order
to maintain the inventory levels. Pan, Guo, Jin, and Liao, (2017) con-
struct a medical resource inventory decision model for emergency
preparation at the airport. Later, Guo, Wood, Pan, and Meng, (2018)
combine the development of risk-averse stochastic models with a ma-
terial replacement strategy to design and develop a perishable emer-
gency supplies inventory system for airports. Among recent studies, the
most similar one to this paper is the one by Saputra et al. (2015). In-
stead of donation and disposal, this paper analyses the inventory
management of perishable products within a government-supplier co-
operation framework utilizing the R&R strategies to timely deal with
the reserves in case of unavailability and wastage.
In general, for a class of products with perishability or fixed shelf-
life, consumers commonly pay close attentions to their expiration dates.
Then, with commercial objective of gaining profits, decision makers
(e.g. retailers) usually assume age-dependent demand rates when de-
signing replenishment policies to manage perishable inventory. Table 2
summarizes the research on cycle time between replenishments with
the issue of age-dependent demand rate for inventory management of
perishable products with a commercial background.
In existing literature, the demand rate is assumed to be a non-in-
creasing function with the products’ age, and most research illustrates
that the quantity of the inventory at the end of each replenishment
cycle should be zero for profit and then to determine the cycle time.
Given the complexity of these models, analytical explanations and
discussions on optimal decisions and properties are carried out, and
specifically designed procedures or algorithms are utilized to generate
optimal decisions. Similar assumptions and solution method are
adopted in the model proposed in this paper with some differences
emphasized. First, the motivation for zero ending inventory in this

711
L. Zhang et al. Computers & Industrial Engineering 127 (2019) 709–721

paper is not primarily for increased profit, but for reducing product

An adaptive heuristic approach

depreciation and wastage from a social welfare viewpoint. Formally,

A procedure (approximation
the zero ending inventory does not happen at the cycle time, but after

An approximation method
A line-search algorithm
the cycle time and before (or at latest at) their expiration. That is to say,

An iterative procedure
A solution procedure

A solution procedure

A solution algorithm

A solution algorithm
in each cycle, materials are reserved for meeting potential emergency

Concave fractional
Solution methods

demands, and then all unused materials are to be recycled at the be-

programming
ginning of a new cycle. Therefore, the optimal duration between re-
method)

plenishments should balance the time for reserving first and for re-
cycling later with the view of meeting potential emergency demand in
Summary of research on cycle time between replenishments with the issue of age-dependent demand rate for inventory management of perishable products with a commercial background.

each cycle. Thus, in the proposed model, R&R strategies are the primary
factors that are analysed first for designing the government’s payment
terms in the contractual cooperation, instead of profits optimization. In
inventory

other words, this paper puts forward a modified replenishment model

Non-zero

Decision
variable
Unsure
Ending

for inventory management of perishable products for humanitarian

Zero

Zero

Zero

Zero

Zero

Zero

Zero
purposes. Other than product’s shelf-life, factors such as market con-
dition, quantity of potential emergency demand, reserves distribution
Decreasing linearly in the selling price and polynomially

A multiplicative function and a pseudo-additive function

A concave form; Dependent on the product’s residual life

Multiplicative function with components of selling price,

A multivariate function of price, freshness, and displayed

between the government and the supplier are considered in this paper
A polynomial function; Dependent on the remaining

A random variable following a normal distribution

A pseudo-additive function of price and time since in order to analyse the R&R strategies and provide guidance for stra-
A linearly decreasing freshness-dependent rate *

A linearly decreasing function of products’ age

tegic suppliers selection and choices of reserves.

with components of price and inventory age

products’ age and promotion expenditure

3. Primary description
over the time after replenishment

displayed-stock-dependent rate

3.1. Contractual relationship

The problem being modelled involves a given government authority

which is interested in establishing a procurement and reserves co-
normalized time

replenishment

operation with a strategic supplier/producer over a long-term horizon

Demand rate

H . It spreads over several sub-periods with two-part procurement

practice in each of them. One part is commitment procurement
stocks

(proactive procurement) at the beginning of each sub-period when the

government commits to procure a certain amount (Q units) of supplies
as pre-positioned materials. The other part is flexible procurement
Batch size; time the products are held in

Price; cycle time; ending-inventory level

Replenishment schedule; dynamic price

Order quantity for each replenishment
Pricing; order quantity; replenishment

Pricing; order quantity; replenishment

Selling price; promotion expenditures;

(reactive procurement), which is activated when emergency demand

Shelf space size; cycle time; ending

occurs. S units of materials are held by the supplier from the beginning
of each sub-period for meeting the government’s reactive procurement
order quantity; cycle length

(if any) in current sub-period. Let tg and ts respectively denote the sub-
period durations between two successive R&R actions for the govern-
ment and the supplier, considering the difference in their costs. Given a
cycle or cycle time
Decision variables

stock; cycle time

reserved materials’ shelf-life T0 , the remaining time (before expiration)

inventory level
Cycle length

Cycle length

during which the materials can be sold are respectively (T0 tg ) and
over time

(T0 ts ) . Beyond T0 , the reserved materials will expire and should be

period

period

disposed of, which is not allowed in this proposed cooperation for hu-
manitarian purpose. Correspondingly, k and j denote the R&R fre-
quencies that should be not smaller than H / T0 . The time distributions of
Maximization (Average long-run profit)
Maximization (Long-run average profit
Minimization (Total unit management

R&R policies are shown in Fig. 1.

Maximization (Profit per unit time)

Maximization (Profit per unit time)

Maximization (Total annual profit)

In practice, addition from the payment (p) for procured materials,

Maximization (Average profit)

the government should pay some subsidies to compensate for the sup-
plier’s costs. This is mentioned in some documents formulated by
cost of products stocked)

government authorities in China. That is, the government should

Maximization (Profit)

Maximization (Profit)

Maximization (Profit)

compensate for the supplier’s inventory holding cost by defraying some

inventory subsidies (Chen et al., 2017). Therefore, the other part of
payment considered in this proposed cooperation is a unit allowance
Objective

(cr ) that is not only for inventory holding cost, but also for some others
rate)

(if any), e.g. cost of operating R&R.

Feng, Chan, and Cárdenas-Barrón,

Herbon and Khmelnitsky (2017)

Chen, Min, Teng, and Li, (2016)
Avinadav, Herbon, and Spiegel,

Avinadav, Herbon, and Spiegel,

Avinadav and Arponen (2009)

Avinadav et al. (2017)

Demirag et al. (2017)

Dobson et al. (2017)

Muriana (2016)
Author (Year)

(2013)

(2014)

(2017)
Table 2

Fig. 1. Time distributions of R&R policies.

712
L. Zhang et al.
3.2. Quantity of the recycled materials that can be sold
When the reserved materials is recycled from the supplier or the
government, they should be sold out for the sake of avoiding depre-
ciation and wastage. To make the optimal R&R strategies, the quantities
of reserved materials that can be sold are expressed analytically. First,
the demand rate of those recycled materials is assumed as a simple
function depending on the remaining normalized time. This simplified
form of demand rate is helpful to focus on the effect of product’s shelf-
life on the decisions of R&R and is more likely to hold when the ma-
terials’ freshness being the main factor that affects customers’ will-
ingness to purchase (Demirag, Kumar, & Rao, 2017). Even though the
freshness of packaged products cannot be observed directly, health-
conscious consumers use the products’ sell-by date as an indicator (IFT,
2014). Therefore, as designed in Avinadav and Arponen (2009) and
shown in Eq. (1), the market demand rate at time t during the re-
maining shelf-life duration can be expressed as (t ) .
t n
(t ) = 0 (1 ) (3) Inventory holding cost: Influence of the disaster occurrence time on
T0
in which 0 < t < T0 , n > 0 is a given parameter and concave for
0 < n < 1, linear for n = 1, and convex for n > 1; 0 denotes the market
demand rate for materials with a full shelf-life duration, 0 = (0) .
Then, the quantities of reserved materials that can be sold from the
supplier and the government are shown in Corollary 1. Correspond-
ingly, in Fig. 2, this quantity (for the supplier) is the area that is
rounded with the dotted line (right side), the demand rate curve and the
x-axis.
T0 0 T0 H n + 1
QT0 = (t ) dt = ( )
Corollary 1..
ts T0 ts n + 1 T0 j
(2)
QT0 tg = 0 T0 H
( )n+ 1
n + 1 T0 k
3.3. Assumptions and notations
(1) Disaster occurrence frequency: Balcik and Ak (2014) consider a
single-period cooperation assuming that a particular region may be
affected by a disaster event in the agreement horizon at most once
and numerically analyse a one-year quantity flexibility contract
with statistically demonstrating the average time between events is
about one and a half years in that given region. In another similar
setting, Liang et al. (2012) numerically analyse a one-year contract
with a very small probability of the disaster occurrence (say less
than 5%) in the horizon. Thus, without losing generality, given the
multi-period problem considered in this paper and low frequency of
high-impact disasters, a relative assumption is proposed. That is,
the disaster occurrence frequency (a) is not larger than the
minimum R&R frequency (H / T0) , since the shelf-life of some typical
relief materials, such as bottled water, processed grain and oil, are
commonly about one to two years or so.
(2) Inventory policy: For simplicity, this paper assumes that all in-
ventory at the beginning of each sub-period have a full shelf-life.
Fig. 2. Demand rate of the reserved materials before their expiration.
Computers & Industrial Engineering 127 (2019) 709–721
Similar assumption is made in Avinadav and Arponen (2009),
Avinadav, Chernonog, Lahav, and Spiegel, (2017), Demirag et al.
(2017) and Dobson, Pinker, and Yildiz, (2017) who assume that
products’ age at each replenishment time is zero. Moreover, if the
reserved materials stored at the beginning of each replenishment
has a high age, then it will be very difficult to sell them when they
are recycled, especially when no disaster events occur in present
sub-period.
Sheffi (2001) illustrates that the “strategic emergency stock” (si-
milar to reserved materials in this paper) should follow a sell-one-store-
one policy; the stock level should be maintained for the next event;
their availability also should be maintained for their primary purpose.
Under prior assumption of disaster occurrence frequency, the proposed
R&R mechanisms, or “intermittent sell-one-store-one” policy, is feasible
and available to meet potential emergency demands for humanitarian
purpose.
(1)
the holding cost is not considered in this paper, since it is quite
challenging (if not impossible) to predict the timing of sudden-onset
disasters (Balcik & Ak, 2014), then to exactly describe its impact on
inventory holding cost. Although Wang, Wu, Liang, and Huang,
(2016) consider the inventory storing time in their research, it is
only used to compare different sourcing strategies but no analytical
result about its impact on decisions is discussed. Therefore, given
the impossibility of explicit expression and the analytical method
utilized in this paper, the holding cost is only determined by the
highest quantity of regular stock and the contractual horizon, but
not affected by the disaster occurrence time.
(4) Execution/usage proportion of reserved materials: Given the multi-
period setting considered in this paper, and respectively denote
the average execution/usage proportion of reserved materials that
are assembled from the government and the supplier in multiple
disasters over the horizon. In practice, it is impossible to predict the
exact disaster demands and occurrence frequencies. But they can be
treated as generating from the same distribution of the regions af-
fected by similar impact disasters (Balcik & Ak, 2014). Thus, fo-
cusing on a class of high-impact disasters in a given region, this
paper considers a situation where the quantity of one demand is not
too different from another.
(5) An additional cost for the government’s operations each time:
Practically, for the government, cost effectiveness is not the primary
or the only requirement to execute procurement (Campbell, 2017;
Thai, 2008), as well as recycling (sales) considered in this paper. To
differentiate from the profit-driven supplier, an additional cost Ct is
introduced to demonstrate the relative low efficiency of the gov-
ernment’s operations each time.
Notations are summarized as follows. The subscripts g and s re-
spectively represent the government and the supplier.
Parameters and variables:
H : contractual horizon;
tg ,ts : sub-period duration between two successive R&R actions;
T0 : shelf-life of the reserved materials;
(t ) : demand rate at time t during the remaining shelf-life duration;
0 : demand rate for materials with a full shelf-life duration;
n : a parameter in demand rate function, reflecting the customers’
perception of the sold materials;
a: disaster occurrence frequency in a region over the contractual
horizon;
Q, S : quantity of reserved materials stored in the warehouses of the
government and the supplier at the beginning of each sub-period to
meet the possible emergency demand in current sub-period. Then,
inventory distribution ratio to the government = Q/(Q + S) ;
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, : mean values of execution/usage proportion of reserved mate- Proposition 1. Supplier’s optimal R&R frequency:
rials that are assembled from the government and the supplier in When (ps c ) S Rs :
multiple disasters over the contractual horizon;
c : unit cost of supplier’s production;
j =
S3 if Rs cS + ps 0 T0 ( )
H n+1
T0
1
jn + 1 ( a
j
n
n+1 ) |
j= n+1 0 T0 H >0
hg , hs : unit holding cost; (n + 1) S T0

Rg , Rs : operational costs of recycling and replenishing materials S 2 else

each time; When (ps c ) S < Rs :
Ct : an additional cost for the government’s operations each time,
hereafter, low-efficiency cost;
Cg : government’s total cost;
S 3 if Rs cS + ps 0 T0 ( ) H n +1
T0
1
jn + 1 ( a
j
n
n+1 ) |
j= n+ 1 0 T0 H
(n + 1) S T0
>0
j =
Cg1, Cg 2, g1 : government’s payment to the supplier, cost of opera- and s (S3) s (S1) under the same decisions of the government
tions, and profit from selling unused materials; S1 else
s : supplier’s total profit;
where S1 = H /T0 , S2 = n+1 0 T0 H
, and S3 is the solution j of
Cs1, s1, s2 : supplier’s cost, profit from the government, and profit (n + 1) S T0

from selling unused materials;

U : lowest profit supplier would like to gain from the cooperation.
Rs cS + ps 0 T0 ( )
H n+1
T0
1
jn + 1 ( a
j
n
n+1 ) = 0.
_
Decision variables: The relationship between the supplier’s R&R frequency decision j
j : supplier’s R&R frequency over the contractual horizon; and its profit s are shown in Fig. 3, where the labels of cases (i.e., 1.1,
k : government’s R&R frequency over the contractual horizon; 1.2, 2.1(1), 2.1(2), etc. that are used for proof in the Appendix A) and
p : unit payment for procured materials; contingent optimal decision points S1, S2, and S3 are presented. When
cr : unit allowance to compensate for the supplier’s costs, including the market condition is favourable ((ps c ) S Rs , case 1.1), the sup-
holding costs, operational costs, etc. plier will actively recycle and replenish the materials, since the sup-
plier’s profit is higher at the points S2 or S3 than at S0. Nevertheless,
4. Model and decision analyses when (ps c ) S < Rs (case 1.2), the supplier may act passively, espe-
cially when the profit at S1 is larger than that at S3.
In this government-led cooperation, the objective is to minimize Cg
under the condition that the supplier would like to participate in the
cooperation; that is,
minCg
k, p, cr

max s (a)
j
s. t .
s U (b)
_ (3)
Eq. (3a) is the incentive compatibility (IC) constraint to ensure that
the supplier’s decision is the optimal. Eq. (3b) is the individual ra-
tionality (IR) constraint to ensure that the supplier is willing to parti-
cipate. Given the sequential considerations of resource utilization and
cost efficiency, in this paper, the R&R strategies are determined first,
then followed by the government’s payment decisions. Fig. 3. Supplier’s profit ( s) as frequency ( j ) changes.

4.1. Supplier’s profit Proposition 2. Given the incentive to maximize the profit (IC constraint),
the supplier’s R&R frequency decision (j) is not determined by the
Over horizon H , the supplier’s cost Cs1 consists of production costs government’s payment (p) , allowance (cr ) or execution proportion of
of all materials ((kQ + jS ) units), the holding cost (S units), and the reserved materials ( ), but by cost parameters (c, Rs ) , materials’ shelf-life
multiple R&R operational costs; thus, (T0 ) , market conditions ( 0 , ps , n) and the highest quantity of reserved
Cs1 = c (kQ + jS ) + hs SH + jRs (4) materials the supplier holds (S ).

The supplier’s profit comes from two sources, the government ( s1) This property straight-forwardly originates from Proposition 1. An
and the market ( s2 ). s1 consists of the allowance over the horizon, intuitive reason behind this result is, for the supplier, the highest
incomes from the sold materials at the beginning of each sub-period (k quantity of reserved materials that should be sold out is S . Then, the
sub-periods with Q units each time) and when emergency demands time duration between two R&R actions should be short in order to
occur (a times with S units on average); thus, provide efficient time to deal with S units of unused materials, which is
much larger than the quantity when some of them have been assembled
s1 = cr SH + p (kQ + a S ) (5) to satisfy emergency demand. When the market condition is good, this
may happen easily. If the market condition is too bad, then a passive R&
s2 , the profit from selling reserved materials, is determined by the
quantity of remaining supplies at the end of each sub-period, either R policy is unavoidably better. This illustrates the application of the
(1 ) S units (a times) or S units ((j a) times), and the quantity of proposed cooperation should focus on those suppliers who have big
demand QT0 ts ; thus, market shares but take relative low operating costs. This also agrees
with the general understandings and observations, i.e. the buyer would
s2 = aps min{QT0 ts , (1 ) S } + (j a) ps min{QT0 ts , S} (6) like to cooperate with capable suppliers, even though the explanations
Then, the supplier’s profit over the horizon is shown as Eq. (7) of capability may be different.
s
It is worth noting that rather than motivating the supplier to recycle
s = s1 + s2 Cs1 = (cr hs ) SH (Rs + cS ) j + (p c ) kQ and replenish the materials, the government’s payment and allowance
+ a {p S + ps min{QT0 ts , (1 ) S }} + (j a) ps min{QT0 ts , S} (7) should be used to compensate for the supplier’s cost and to encourage

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the supplier to participate into the cooperation. This property reveals

an important advantage of this contractual relationship. That is, given
the supplier’s intension to maximize profit, the market, instead of the
government, plays the major role in monitoring the supplier’s R&R
action. This is very useful to decrease the government’s burden to check
the availability of the reserved materials stored in the supplier’s
warehouses. However, this property emphasizes the importance of
those listed input factors (in Proposition 2) that the government should
consider and evaluate carefully when selecting strategic suppliers as
well as appropriate materials that are used as reserves.
Theorem 1. Parameters’ impacts on supplier’s frequency decision in the
supplier’s case 2.1(1):

Fig. 4. Government’s costs (Cg ) as frequency (k ) changes.

(1) The parameters Rs , c, S , T0 all have negative effects on the optimal R&R
frequency j , but the parameters a, ps , 0 , H all have positive effects.
That is, j / Rs < 0, j / c < 0, j / S < 0, j / T0 < 0 ; R&R frequency k , but the parameters a, ps , 0 , H all have positive effects.
j / a > 0, j / ps > 0, j / 0 > 0, j / H > 0 . That is, k / Q < 0, k / Rg < 0, k / Ct < 0, k / T0 < 0;
(2) There is no obvious positive or negative relationship between j and n , k / a > 0, k / ps > 0, k / 0 > 0, k / H > 0 .
unless other numerical values are known. (2) There is no obvious positive or negative relationship between k and n ,
unless other numerical values are known.

4.2. Government’s costs

(3) Since k is the solution of (k )n+ 1 k
1 a n
n+1
= (
Rg + pQ + Ct
)
H n + 1 , the optimal
ps 0 T0 ( )
T 0
k decreases in p , then the payment p in this case is equal to c , given the
Over the horizon H , the government’s cost Cg1 includes allowance resource utilization consideration.
and payment to the supplier, which is equal to s1, as shown in Eq. (8).
Theorem 3. When the IR constraint (Eq. (3b)) is bounded and under the
Cg2 consists of the government’s holding costs, operational costs and
condition of k = n + 1 0 T0 T , government’s costs are constant with
H
low-efficiency costs to recycle and replenish reserved materials (k (n + 1) Q 0
times), as shown in Eq. (9). different combinations of p and cr .
Cg1 = cr SH + p (kQ + a S ) (8) Theorem 3 implies that the government can utilize different com-
binations of these two decisions to satisfy various purposes, as long as
Cg 2 = hg QH + k (Rg + Ct ) (9) the conditions are met. For example, a high payment for actual pro-
The cash inflow of the government ( g1) only comes from recycling curement rather than a high compensation for supplier’s operational
(selling) reserved materials, which is similar to the supplier’s, thus, costs is preferred given the government’s funding limitation when no
disaster happens. In contrast, a relatively high-level allowance may be
= aps min{QT0 tg , (1 ) Q } + (k a) ps min{QT0 tg , Q} (10) appropriate to add operational funds for small and medium-sized sup-
g1

Then the government’s costs Cg over the horizon is shown as Eq. pliers. Given Proposition 2 and Theorem 3, the next theorem is pro-
(11). posed straight-forwardly.

Cg = Cg1 + Cg 2 = hg QH + cr SH + (Rg + pQ + Ct ) k Theorem 4. The averaged execution/usage proportions, and , do not

g1
influence the optimal frequency decisions j and k . Their influence on p can
+ a {p S ps min{QT0 tg , (1 ) Q}} (k a) ps min{QT0 tg , Q} be transferred to cr , when the conditions mentioned in Theorem 3 are met.
(11)
The deduction and structure of the government’s optimal R&R fre- 4.3. Decision-making procedure
quency are similar to those of the supplier’s, which is omitted for
brevity. Then, the relationship between the government’s R&R fre- Given the decisions’ complexity, a decision-making procedure is
quency decision k and its costs Cg are shown in Fig. 4. constructed in this subsection. Notably, (i) j is not impacted by p
Similar to the supplier’s decision, the government’s decision k is not (Proposition 1); (ii) p is set to be c in government’s case 2.1(1)
impacted by , but is correlated with its own payment decision (p) ,
(Theorem 2), and (iii) when k = (case 2.1(2)), govern-
0 T0 H
n+1
since the payment (p) is used to distinguish case 1.1 and case 1.2. (n + 1) Q T0

Specifically, when p is not larger than ps (Rg + Ct )/ Q (case 1.1), the ment’s costs are constant with different combinations of p and cr
government will actively recycle and replenish reserves (at the point G1 (Theorem 3). Thus, without loss of generality, in the procedure, p is
or G2). Otherwise, a passive R&R strategy may be carried out, espe- equal to c . Several Conditions and Formulas that will be used are as
cially when the cost at the point G0 is smaller than that at G2. To avoid follows. Especially, the optimal frequencies are the integers that make
huge resource wastage and improve utilization, in the following ana- formula 1 or 3 most close to zero, if happens.
lysis, the government’s payment decisions is narrowed into the ranges:
(1) c p ps (Rg + Ct )/Q and (2) cr 0 . There are two practical
meanings of these price ranges. On one hand, the payment for actual
Condition 1. max { H
T0
, n + 1 0 T0 T
H
(n + 1) S 0 }< (n + 1) a
n
Condition 2.
procurement should exceed the supplier’s unit production cost, but
should be less than the market price minus unit operational costs.
Rs cS + ps 0 T0 ( ) H n+1
T0
1
jn + 1 ( a
j
n
n+1 ) |
j = max TH , n + 1
0
0 T0 H
(n + 1) S T0
>0
Otherwise, it will be cheaper to buy the reserves from the market than
from the supplier. On the other hand, some allowance should be paid to Condition 3. max { H
T0
, n + 1 0 T0 T
H
(n + 1) Q 0 }< (n + 1) a
n
compensate for the supplier’s costs as many regulations require. Condition 4.
Theorem 2.. In the government’s case 2.1(1): R g + cQ + Ct ps 0 T0 ( )
H n +1
T0
1
kn + 1 ( a
k
n
n+1 ) |
k = max H , n+1
T0
0 T0 H
(n + 1) Q T0
<0

(1) The parameters Q, Rg , Ct , T0 all have negative effects on the optimal Formula 1.
1
(j ) n + 1 ( a
j
n
n+1 ) ps 0 T0
Rs + cS
H
n+1 =0
T0

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Fig. 5. Sensitivity analysis of T0 .

Fig. 6. Sensitivity analysis of n .

Formula 2. s U = hs SH (Rs + cS ) j + aps min{QT0 ts , (1 ) S} Step 1. If (ps c ) S Rs , go to Step 1.1; else go to Step 1.2.
_ j
Step 1.1. If Conditions 1 and 2 are met, then the optimal j is the
+ (j a) ps min{QT0 ts , S} U
_ solution of Formula 1 (S3); else j = max { H
T0
, n + 1 0 T0 T
H
(n + 1) S 0 } (S2).
Formula 3.
1
(k ) n + 1 ( a
k
n
n+1 ) Rg + cQ + Ct
H
n+1 =0 Then go to Step 2.
ps 0 T0
T0 Step 1.2. If Conditions 1 and 2 are met, then the optimal j is the

Fig. 7. Sensitivity analysis of (on optimal fre-

quencies).

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L. Zhang et al. Computers & Industrial Engineering 127 (2019) 709–721

Fig. 8. Sensitivity analysis of (on government’s

costs).

number that causes a larger value of Formula 2 when j is equal to
H / T0 (S1) and is the solution of Formula 1 (S3); else j = H / T0
(S1). Then go to Step 2.
Step 2. If Conditions 3 and 4 are met, go to Step 2.1, else go to Step
2.2.
Step 2.1. The optimal k is the solution of Formula 3 (G2) with
p = c . Given the j , k , p , the optimal cr is the solution when
Eq. (3b) is bounded. Then go to Step 3.
Step 2.2. Bring k = n + 1 0 T0 T (G1) and j into Eq. (3b), and
H
(n + 1) Q 0
then select a random combination of p and cr to bound Eq. (3b).
Then go to Step 3.
Step 3. Calculate the government’s costs given the optimal decisions
( j , k , p and cr ).
condition is much more favourable, say 0 = 2000 , the government only
has to pay the supplier for the actual procurement, without having to
subsidize the supplier for holding the reserves. In this case, it is not
burdensome for the supplier to timely deal with those materials. In
addition, the middle three rows in Table 3 show that different combi-
nations of p andcr can lead to constant government costs, as mathe-
matically proved in Theorem 3. Actually, there are many combinations
that will lead to the same result, at least before cr decreasing to zero
with an increasing p . Three examples are given here for illustration.
This phenomenon also holds when 0 = 2000 , which is not shown in
Table 3 for brevity.
5. Sensitivity analyses

A numerical example is designed to exam the procedure. More sensi- Focusing on the impacts of government-supplier contractual co-
tivity analyses will be presented in the following section. Firstly, it is ne- operation for guaranteeing the reserves’ availability and avoiding re-
cessary to specify a particular set of parameter values to act as a base case. source wastage, sensitivity analyses in this paper especially consider
That are as follows, with quantity measured in unit, price in yuan, and time three key parameters T0, n and . In practice, T0 and n are commonly
in month:hg = 0.5; hs = 0.3; Rg = 10, 000; Rs = 8000; Ct = 10, 000; different among materials that are produced by the same supplier or
c = 10; Q = 20, 000; S = 20, 000; = 0.8; = 0.5; ps = 20; H = among different suppliers, where that determines the quantity of held
20 12; a = 8; T0 = 2 12; n = 0.4; U = 1, 000, 000 . The full shelf- reserves is also an important factor for evaluating the feasibility of the
_ supplier for strategic cooperation. Specially, in this section sensitivity
life demand rate ( 0) is varied in this example. analyses are shown to discuss the impact of the variation of these input
factors on the governments’ costs. For each sensitivity analysis, the
Table 3 input factor is varied, while other factors are kept constant and equal to
Optimal decisions of the government and the supplier under different full shelf- the numerical values presented in Section 4.3 with 0 = 2000 . In each
life demand rate levels. subsection, graphic results are shown and followed by analyses and
k j p cr Cg discussions.
0

1000 10 11 10 0.30 5,502,200 5.1. Sensitivity analysis of T0

1500 12 12 10 0.20 4,548,600
1500 12 12 11 0.13 4,548,600
1500 12 12 12 0.06 4,548,600
Impacts of materials’ shelf-life on government’s costs are shown in
2000 15 15 10 0.09 3,578,200 Fig. 5.

Observation 1. The government’s costs function is first convex and then

Table 3 shows that the full shelf-life demand rate 0 has positive
effect on both the government’s and the supplier’s R&R frequency de-
cisions, as mathematically proved in Theorems 1 and 2. When the
market condition is not favourable, say 0 = 1000 , the government will
passively deal with the reserved materials and has to nearly compensate
the supplier for all costs of production and holding. At the same time,
owing to the relative low cost of operations, the supplier may be more
likely to take R&R actions. When 0 is larger, they both tend to be more
active, and the government can pay less to motivate the supplier to
cooperate, since the incomes from selling in the market can partially
compensate for the supplier’s costs and risks. When the market
concave in materials’ shelf-life. That is, 2Cg / T02 > 0 in the short shelf-
life range, and then 2Cg / T02 < 0 in the long shelf-life range.
An intuitive reason behind this observation is that when shelf-life is
short, people are sensitive to the remaining time before expiry.
Frequent recycling is necessary, causing high operational costs and then
the government’s costs. As optimal R&R frequencies decrease with
shelf-life (Theorems 1 and 2), when the shelf-life is long, frequent re-
cycling is not needed. However, the relatively high costs in the long
shelf-life range, somehow reflect the low utilization ratio and wastage.
In practice, materials with the same function may have different

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periods for the shelf-life, for example, considering the shelf-life of
cooking oils, for peanut oil and blended edible oil is approximately
18 months and is 24 months for olive oil. Moreover, the shelf-life of
different brands of the same type of materials may not be the same,
either. Taking bottled water as an example. The shelf-life of Nongfu
Spring is 24 months, but that of Master Kong is 12 months. Therefore,
when selecting strategic suppliers for long-term cooperation, the gov-
ernment should consider the function, type and specific shelf-life of the
materials that suppliers can provide, and then choose the most proper
one as reserves based on the costs generated from the proposed model.
5.2. Sensitivity analysis of n
Impacts of customers’ perception on government’s costs are shown
in Fig. 6.
Observation 2. The government’s costs function is increasing and concave
in the coefficient n . That is, Cg / n > 0 , 2Cg / n2 < 0 .
The reason behind this observation is that as n increasing, the
quantity of reserved materials that can be sold in the same duration
(before expiration) decreases. Thus, value loss and wastage of these
reserved materials will be high and the government’s costs will in-
crease. However, when n reaches a high level, it will not impact the
government’s costs at all. This is because, the customers are extremely
sensitive to the materials’ shelf-life even when the materials are “very
young”, and the materials cannot be sold when they are a little old,
which is not the common case or the situation considered in this paper.
The parameter range 0 < n 1, or demand rate as a concave
function, is common in some industries. This might be due to reasons
such as reduced functionality and/or freshness, lower customer con-
fidence in the quality of the product, and the presence of limited op-
portunities for its consumption (Demirag et al., 2017). Therefore, the
government should pay great attentions to the customers’ perception on
the materials that the supplier can provide, as well as some other fac-
tors, for example package technologies that not only impact the pro-
duct’s shelf-life, but also the customers’ consumption (Verghese, Lewis,
Lockrey, & Williams, 2015). In addition, the consumption rates of dif-
ferent materials vary, where it might be better to recycle and replenish
the reserves with a longer consumption time more frequently.
Table 4
Managerial insights proposed in this paper.
Managerial insights
Under the proposed contractual cooperation, the government can clearly
evaluate the supplier’s costs and losses and then easily coordinate with
suppliers to determine payment terms
The government should prefer to selecting creditworthy and capable
enterprises, if any, for strategic cooperation
Under the proposed contractual cooperation, the government can balance
payments in pre-disaster phase with those after a disaster under certain
conditions
The government can use this model to select proper strategic suppliers in its
administrative region
The government should actively cooperate with suppliers to co-reserve
perishable items
Computers & Industrial Engineering 127 (2019) 709–721
5.3. Sensitivity analysis of
Impacts of inventory distribution ratio to the government on fre-
quency decisions are shown in Fig. 7, and on government’s costs are
shown in Fig. 8.
Observation 3.
(1) The supplier’s optimal R&R frequency increases with the inventory dis-
tribution ratio, while the government’s decreases. That is,
j / > 0, k / < 0 .
(2) The optimal R&R frequencies are both convex in inventory distribution
ratio. That is 2j / 2 > 0, 2k / 2 > 0 .
(3) The government’s costs function is convex in inventory distribution ratio.
That is, 2Cg / 2 > 0 .
When the government holds a large proportion of the reserves, the
supplier can frequently execute R&R because of the small quantity of
reserves that are needed to deal with. Under this situation, the gov-
ernment will passively recycle the reserves and even wait for their ex-
piration when the distribution ratio is high. This somehow reflects the
necessity of the cooperation between the government and the supplier
to co-reserve materials for meeting potential emergency demands,
especially when the materials are perishable. Results from this sensi-
tivity analysis show that in this contractual cooperation, there might be
some range in which the government can select a proper inventory
distribution ratio. The government’s costs can be low when the supplier
holds the majority of reserves, while it may be not sensible to “put all
eggs in one basket”. If happens, back-up suppliers may be needed in
case that the strategic supplier fails to provide required materials. This
may lead to other costs or profits from additional cooperation, which is
not in the research scope of this paper, but is a meaningful further re-
search direction. However, it is obvious that if the government co-
operates with several identical suppliers, the results proposed in this
paper still hold well.
Owing to the complexity in decision-making, it is difficult to strictly
tell why the government’s cost function is convex in inventory dis-
tribution ratio. There are some possible reasons. First, owing to the
relatively high costs of operations, the economic efficiency might be
low if the government own reserves for many types of materials, de-
pending on the supplier in order to decrease costs. However, under this
Origins Practical applications
Propositions 1 and 2 Driven by profit maximization, the supplier tends to recycle and
replenish the reserves based on external factors, such as market
conditions, materials’ shelf-life, the quantity of regularly reserved
materials. Thus, the government should evaluate these factors before
cooperating with suppliers
Proposition 2 The bigger the market share and the lower the operational costs, the
easier and the cheaper for the cooperative supplier to timely deal with
reserved materials. Then, the government’s costs will be low
Theorem 3 For large enterprises, payment for actual procurement may be more
helpful for the government to release the pressure from the difficulties in
obtaining funding for pre-disaster activities (Kunz, Reiner, & Gold,
2014)
For small and medium-sized enterprises with capacity and financial
constraints, a relative big allowance may release their pressures from
carrying out R&R actions
Table 3; Observations Market share, customer’s perception and consumption rate, package
1 and 2 technology, and shelf-life are usually varied among materials produced
by one enterprise or several enterprises. Based on the proposed model,
the government can select strategic suppliers by choosing proper
products that are most economic as reserves
Observation 3 When the government determines or allocates inventory to warehouses
of perishable products, it may be better to consider optional suppliers
first, instead of passively discovering cooperative suppliers at a later
stage
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situation, the supplier’s R&R frequency will be low, as shown in Fig. 7.
Then, the supplier cannot gain enough from the market, but has to
partially depend on government’s payment, which in turn increases the
government’s costs. Thus, because of these two opposite effects, the
lowest cost might appear when is small, especially when the former
effect on the government’s costs is larger than the latter, given the
market condition is much more favorable.
The curve in Fig. 8 essentially verifies the feasibility and applic-
ability of the proposed model. Specially, if it is concave or linear, then it
means that the materials should all be reserved by either the govern-
ment or the supplier. This is impossible and unpractical. On one hand, it
is completely impossible that the government’s warehouses can store
the huge amount of materials for meeting emergency demands caused
by high-impact disasters. On the other hand, the government has to
keep certain amount of materials, as many regulations require and also
due to the risk of solely depending on suppliers, even if they are
trustful.
6. Conclusions
This paper investigates ways of procurement and inventory man-
agement cooperation between a government authority and its strategic
suppliers to co-reserve perishable materials in order to meet potential
emergency demands. A quantity commitment contract is established to
characterize the cooperation. Focusing on common reserved materials,
such as bottled water, packaged food and medicines, this paper in-
troduces a demand rate that decreases with the product’s age. Optimal
R&R strategies are generated for reducing possible value loss/
depreciation and wastage caused by excessive reserves and intermittent
demands. Government’s payment strategies are subsequently analysed
to achieve the cooperation. The managerial insights proposed in this
paper, aligned with their origins and practical applications, are sum-
marized in Table 4.
For further research, one direction that can be explored is to study
how suppliers can be subsidised under smooth fluctuations of the
market price over the horizon, as well as the possible abrupt increase of
market prices when disasters strike. Another area that can be studied in
the future is to increase the number of suppliers to broaden the gov-
ernment’s cooperation / supply network to observe the cost implica-
tions, or to introduce back-up suppliers to reduce the risk of highly
depending on single strategic supplier. Although food and medicines
are used as examples of emergency inventory, the proposed model is
also applicable to reserves of other commodities, such as equipment
with a technical or economic shelf-life. It is because when a same-
function product with better technical specifications comes on the
market, demand for the reserved equipment may significantly decrease.
Recycling reserves at the right time is important not only to reduce
wastage and costs but also to take advantage of technical advances.
Acknowledgements
This research was supported by the National Natural Science
Foundation of China under Grants No. 71171157 and No. 71390331,
and also by a Strategic Research Grant (SRG) from City University of
Hong Kong (Project No.: 7004699).

Appendix A. Main proofs

Proof of Proposition 1. Case 1. If the higher supply level is below the market demand, i.e., S QT0 ts , then the supplier’s profit and its first-order
derivative are shown as Eqs. (a1) and (a2).
s = (cr hs ) SH (Rs + cS ) j + (p c ) kQ + a {p S + ps (1 ) S } + (j a) ps S (a1)

s
= Rs cS + ps S
j (a2)

Case 1.1 When (ps c) S Rs , Eq. (a2) is positive, then the optimal j is the larger one between n+1 0 T0 H
and H / T0 .
(n + 1) S T0
Case 1.2 When (ps c ) S < Rs , Eq. (a2) is negative, then the optimal j is H / T0 .
Case 2. If the market demand falls between two supply levels, i.e., (1 ) S < QT0 ts < S , then the supplier’s profit and its derivatives are shown
as Eqs. (a3), (a4), and (a5).
n+1
0 T0 H
s = (cr hs ) SH (Rs + cS ) j + (p c ) kQ + a {p S + ps (1 ) S } + (j a) ps
n + 1 T0 j (a3)
n+1
s H 1 a n
= Rs cS + ps 0 T0 [ ( )]
j T0 jn + 1 j n+1 (a4)
2 n+1
s H 1
= ps 0 T0 [nj (n + 2) a]
j2 T0 jn + 3 (a5)
Case 2.1 When nj (n + 1) a , Eq. (a5) is negative. Eq. (a4) is negative when j = (n + 1) a/ n .
(1) If Eq. (a4) is positive when j = n+1 0 T0 H
, then the optimal j is obtained by setting Eq. (a4) equal zero; (2) If not, then j = n+1 0 T0 H
.
(n + 1) S T0 (n + 1) S T0
Case 2.2 When (n + 1) a < nj < (n + 2) a , Eq. (a4) and Eq. (a5) are both negative. The optimal j is (n + 1) a/ n .
Case 2.3 When nj > (n + 2) a , Eq. (a4) is negative and Eq. (a5) is positive. The optimal j is (n + 2) a/ n .
Case 3. If the market demand is less than the lower supply level, i.e., QT0 ts (1 ) S , then the supplier’s profit is shown as Eq. (a6) with
s/ j= Rs cS
n
p T
n+1 s 0 0 ( )H n+1
T0 j
< 0 . Therefore, the optimal j is n + 1 0 T0
(n + 1)(1
H
) S T0
in this case.
n+1 n+1
0 T0 H 0 T0 H
s = (cr hs ) SH (Rs + cS ) j + (p c ) kQ + (j a) ps + a p S + ps
n + 1 T0 j n + 1 T0 j (a6)
Therefore, Proposition 1 is proved and Fig. 3 is developed. □

719
L. Zhang et al. Computers & Industrial Engineering 127 (2019) 709–721

( )
Gj nj (n + 2) a Gj 1
Poof of Theorem 1. Set , then < 0. Therefore,
1 a n Rs + cS
Gj = = < 0, =
(j ) n + 1 j n+1 H
ps 0 T0 ( )n + 1 j (j )n + 3 Rs H
n+1
T 0 ps 0 T0
T0
G
j
j (j ) n + 3
Rs
= Rs
Gj
= n+1 < 0 . Other proofs of (1) are similar and omitted for brevity. However, the (2) in Theorem 1 is
H
ps 0 T0 (nj (n + 2) a)
j T0
(n + 1) a nj 1 Rs + cS T
lnj + + ln 0
Gj (n + 1)(j )n + 2 (n + 1)2 (j )n + 1 H
n+1 H
Gj ps 0 T0
(n + 1) a nj 1 Rs + cS T j T0
different. n + 1 ln H ; . Since ln H0 < 0 , the sign
0 n T
= n + 2 lnj = =
n (n + 1)(j ) (n + 1)2 (j )n + 1 H n Gj nj (n + 2) a
ps 0 T0 (j )n + 3
T0 j

of j
is uncertain. □
n

Proof of Theorem 2. The proofs of (1) and (2) are similar to that of Theorem 1, and omitted for brevity. The proof of (3) is as follows.
In government’s case 2.1 (1):

0 T0 H n+1
Cg = hg QH + cr SH + (Rg + pQ + Ct ) k + a {p S ps (1 ) Q} (k a) ps ( )
n + 1 T0 k

Then
Cg
k
= Rg + pQ + Ct ps 0 T0 ( ) H n+1
T0
1
[ n+1 k
k
a
( n
n+1
] )
The optimal k is the solution of
1
( a
(k ) n + 1 k
n
n+1 )= Rg + pQ + Ct
H
ps 0 T0 ( )n + 1
T 0

Set G k =
1
(k )n + 1 ( a
k
n
n+1 ) Rg + pQ + Ct
ps 0 T0 ( )
T
H n+1
, then
Gk
k
=
nk (n + 2) a
(k )n + 3
< 0,
Gk
p
=
ps 0 T0
Q
H
n+1 <0
0 T0
G G
Therefore, k / p = k
p
/ kk < 0; p has negative impact on the optimal R&R frequency. Given the resource utilization consideration, p is set to
be c in this case to increase the government’s R&R frequency. □

Proof of Theorem 3. On one hand, two components of the supplier’s profit, and Cs1, are not impacted by p and cr when k = . Given
0 T0 H
s2 n+1
(n + 1) Q T0
s1 = U s2 Cs1, once Eq. (3b) is bounded by selecting the combination of p and cr , s1 is determined. On the other hand, when the
_
government’s frequency k is not related to the payment decision p and cr , the government’s costs Cg1 that is equals to s1 is independent of Cg2 and
g1 . Then, when k = , is a constant with different combinations of p and cr .
H
0 T0
n+1 Cg = Cg1 + Cg 2 g1 □
(n + 1) Q T0

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