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

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 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

Comparison between minimum purchase, quantity flexibility contracts and spot procurement in a supply chain

When, in a supply chain, a supplier and a buyer have the choice of transaction form to do business, the equilibrium transaction form which emerges is much more constrained than previously envisaged in literature. In this paper, two forms of long-term supply contracts and procurement in the spot market are compared. A capacity constrained service provider and a buyer of such service choose among three different transaction forms: spot procurement, minimum purchase commitment and quantity flexibility contracts. The ultimate demand the buyer has to satisfy and the spot market price of the input she has to purchase from the supplier are exogenous stochastic processes. Complete analytical results and a numerical example are presented. This paper builds upon recent supply chain contract literature by trying to join in one setting problems which up till now were considered in isolation.contracts, supply chain, statistical decision theory, optimization techniques, transactional relationships

Mixed contracts for the newsvendor problem with real options

In this paper we consider the newsvendor model with real options. We consider a mixed contract where the retailer can order a combination of q units subject to the conditions in a classical newsvendor contract and Q real options on the same items. We provide a closed form solution to this mixed contract when the demand is discrete and study some of its properties. We also offer an explicit solution for the continuous case. In particular we demonstrate that a mixed contract may be superior to a real option contract when a manufacturer has a bound on how much variance she is willing to accept.Newsvendor model; real options; discrete demand; mixed contract

Options Procurement Policy for Option Contracts with Supply and Spot Market Uncertainty

Supplier’s reliability is a major issue in procurement management. In this paper, we establish a decision making model from the perspective of the firm who will procure from the multiple suppliers and the spot markets. The suppliers are unreliable and provide different types of option-type supply contracts which should be made before demand realization, while the spot market can only be used after demand realization and has both the price and liquidity risks. We establish the optimal portfolio policies for the firm with conditions to find the qualified suppliers. By defining a new function which contains the demand risk, the supplier’s risk, and the liquidity risk, we find that the optimal policy is to allocate different curves of this function to different suppliers. We also study some special cases to derive some managerial insights. At last, we numerically study how the various risks affect the choice of suppliers and the value of the option contract

Dual Sourcing Using Capacity Reservation and Spot Market: Optimal Procurement Policy and Heuristic Parameter Determination

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 and reservation level. A reservation cost, proportional with the reservation level, has to be paid for the option of receiving any amount per period up to the reservation level. A long-term decision has to be made regarding the reserved capacity level, and then it has to be decided - period by period - which quantities to procure from the two sources. Considering the multi-period problem with stochastic demand and spot price, the structure of the optimal combined purchasing policy is derived using stochastic dynamic programming. Furthermore, a simple heuristic procedure is developed to determine the respective policy parameters. Finally, we present a comprehensive numerical study showing that our heuristic policy performs very well

Inventory management strategies propensity toward supply chain management in the aerospace industry in Malaysia : the moderating effect of financial risk consideration

This thesis examined the relationship between inventory management strategies (IMS) and supply chain management (SCM) performance in the aerospace industry, an advanced and high technology industry that is characterized by a high working capital with potential huge losses if something goes wrong. The IMS dimensions of stock holding, safety stock, storage policy and inventory risk were tested against the SCM performance dimensions of on-time delivery (OTD), balance score card (BSC), inventory turn and factors related to inventory-financial risks. The quantitative research methodology was opted for this study. Data collection was performed from January to May 2016, involving 81 respondents related to the aerospace industry in Malaysia. This accounted for 40.5% of the population in the country. The Statistical Package for the Social Sciences (SPSS) was used to assist in the analysis. The findings indicated that only two dimensions of the IMS are used as predictors for the SCM performance. It also revealed that every dimension of the SCM performance is significant with only one dimension of the IMS. The most important dimension of SCM performance is the inventory risk dimension. Contrary to the initial expectation, storage policy is found to be insignificant for the theoretical relationship in this industry and the financial risk factor is found to be a weak moderator in the proposed relationship. The findings also suggested the need to examine financial risk consideration as the independent variable when examining the SCM performance in the aerospace industry. Moreover, these findings can be considered unique as they offer different contributing dimensions to the SCM performance and these should be the eye-opener to the organizations that have different attributes, in particular the high technology industry that involves high working capital