Consider a single manufacturer and a single supplier. Six months before demand is realized, the manufacturer has to sign a supply contract with the supplier. The sequence of events is as follows. Procurement contracts are signed in February and demand is realized during a short period of 10 weeks that starts in August.

Components are delivered from the supplier to the manufacturer at the beginning of August and the manufacturer produces items to customer orders. Thus, we can ignore any inventory holding costs. We will assume that unsold items at the end of the 10-week selling period have zero value. The objective of the manufacturer is to identify a procurement strategy so as to maximize its expected prot.

Specically, consider a manufacturer that needs to nd supply sources for electricity. The manufacturer produces and sells products to end customers at a unit price, $20, and we assume that the only contributor to the production cost is the cost of electricity. To simplify the example, we assume that a unit of electricity is required to produce a unit of nished good. The manufacturer thus has information on the distribution of the demand for electricity. More precisely, she knows that demand for electricity follows the probabilistic forecast described in Table 4-4.