Capacity Reservation under Spot Market Price Uncertainty

The traditional way of procurement, using long-term contract and capacity reservation, is competing with the escalating global spot market. Considering the variability of the spot prices, the flexibility of combined sourcing can be used to benefit from occasional low short-term spot price levels while the long-term contract is a means to hedge the risk of high spot market price incidents. This contribution focuses on the cost-effective management of the combined use of the above two procurement options. The structure of the optimal combined purchasing policy is complex. In this paper we consider the capacity reservation - base stock policy to provide a simple implementation and comparison to single sourcing options. Our analysis shows that in case of large spot market price variability the combined sourcing is superior over spot market sourcing even in case of low average spot market price and also superior over long-term sourcing even in case of high average spot market price.Capacity reservation; spot market; purchasing policy; supply chain contracts; stochastic inventory control

The structure of the optimal combined sourcing policy using capacity reservation and spot market with price uncertainty

This contribution focuses on the cost-effective management of the combined use of two procurement options: the short-term option is given by a spot-market with random price, whereas the long-term alternative is characterized by a multi period capacity reservation contract with fixed purchase price, reservation level and capacity reservation cost. Considering a multiperiod problem with stochastic demand, the structure of the optimal combined purchasing policy is derived using stochastic dynamic programming.Capacity reservation, spot market, purchasing policy, supply contracts, stochastic inventory control

Control and Communication Protocols that Enable Smart Building Microgrids

Recent communication, computation, and technology advances coupled with climate change concerns have transformed the near future prospects of electricity transmission, and, more notably, distribution systems and microgrids. Distributed resources (wind and solar generation, combined heat and power) and flexible loads (storage, computing, EV, HVAC) make it imperative to increase investment and improve operational efficiency. Commercial and residential buildings, being the largest energy consumption group among flexible loads in microgrids, have the largest potential and flexibility to provide demand side management. Recent advances in networked systems and the anticipated breakthroughs of the Internet of Things will enable significant advances in demand response capabilities of intelligent load network of power-consuming devices such as HVAC components, water heaters, and buildings. In this paper, a new operating framework, called packetized direct load control (PDLC), is proposed based on the notion of quantization of energy demand. This control protocol is built on top of two communication protocols that carry either complete or binary information regarding the operation status of the appliances. We discuss the optimal demand side operation for both protocols and analytically derive the performance differences between the protocols. We propose an optimal reservation strategy for traditional and renewable energy for the PDLC in both day-ahead and real time markets. In the end we discuss the fundamental trade-off between achieving controllability and endowing flexibility

Small Business Set-asides in Procurement Auctions: An Empirical Analysis

As part of public procurement, many governments adopt small business programs to pro- vide contract opportunities for businesses often with preferences for firms operated by mem- bers of groups designated as disadvantaged. The redistribution arising from such programs, however, can introduce significant added costs to government procurement budgets. In this paper, the extent to which small business set-asides increase government procurement costs is examined. The estimates employ data on Japanese public construction projects, where approximately half of the procurement budget is set aside for small and medium enterprises (SMEs). Applying a positive relationship between profitability and firm size obtained by the non-parametric estimation of asymmetric first-price auctions with affiliated private values, a counterfactual simulation is undertaken to demonstrate that approximately 40 percent of SMEs would exit the procurement market if set-asides were to be removed. Surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency.

Competition in the supply option market

This paper develops a multi-attribute competition model for procurement of short life cycle products. In such an environment, the buyer installs dedicated production capacity at the suppliers before the demand is realized. Final production orders are decided after demand materializes. Of course, the buyer is reluctant to bear all the capacity and inventory risk, and thus signs flexible contracts with several suppliers. We model the suppliers' offers as option contracts, where each supplier charges a reservation price per unit of capacity, and an execution price per unit of delivered supply. These two parameters illustrate the trade-off between total price and flexibility of the contract, and are both important to the buyer. We model the interaction between the suppliers and the buyer as a game in which the suppliers are the leaders and the buyer is the follower. Specifically, suppliers compete to provide supply capacity to the buyer and the buyer optimizes its expected profit by selecting one or more suppliers. We characterize the suppliers' equilibria in pure strategies for a class of customer demand distributions. In particular, we show that this type of interaction gives rise to cluster competition. That is, in equilibrium, suppliers tend to be clustered in small groups of two or three suppliers each, such that within the same group all suppliers use similar technologies and offer the same type of contract. Finally, we show that in equilibrium, the supply chain inefficiencies, i.e., the loss of profit due to competition, are in general at most 25% of the profit of a centralized supply chain, for a wide class of demand distributions.supplier portfolio; supplier competition;

Smallholder Participation in Agricultural Value Chains: Comparative Evidence from Three Continents

Supermarkets, specialized wholesalers, and processors and agro-exporters’ agricultural value chains have begun to transform the marketing channels into which smallholder farmers sell produce in low-income economies. We develop a conceptual framework through which to study contracting between smallholders and a commodity-processing firm. We then conduct an empirical meta-analysis of agricultural value chains in five countries across three continents (Ghana, India, Madagascar, Mozambique, and Nicaragua). We document patterns of participation, the welfare gains associated with participation, reasons for non-participation, the significant extent of contract non-compliance, and the considerable dynamism of these value chains, as farmers and firms enter and exit frequently.