Consider an organization whose capability to produce an item and whose cust
omer demand are both stochastic. In such a context "take-or-pay" contracts
can be attractive. Under such a contract the organization agrees to purchas
e from a supplier a fixed quantity per period over a specified number of pe
riods. Simulation is too slow an analysis approach for the typical dynamic
negotiation situation. We use a Markovian approach to create a tool that ne
gotiators can use to evaluate the expected cost of a proposed contract, con
sidering the stochastic demand and all relevant cost components. The approa
ch is fast enough to use in real time, and yields accurate (sometimes exact
) results. (C) 2000 Elsevier Science B.V. All rights reserved.