The Effect of Material Price and Product Demand Correlations on Combined Sourcing and Inventory Management

Both material sourcing and inventory management are important competitiveness factors, and it is a significant challenge to integrate the two areas. In sourcing, combined strategies using long-term contracts and the spot market received increasing attention recently, typically concentrating on the financial effects. However, there is limited research on the consequence of combined sourcing considering both purchasing and inventory effects from an operations point of view. In this paper, we analyze the effect of uncertainty on the combined sourcing decision under stochastic demand and random spot-market-price fluctuations and exploit the benefits of forward buying in periods with low spot-price realizations, but also of intended backordering in case of a high spot price. Since the decision on capacity reservation has to take into account the short-term utilization of each source which in turn depends on the available long-term contract capacity, decision making faces highly complex interactions between long-term and short-term decisions.From finance research, we find scarce evidence that the spot prices of commodities evolve independently over time. Rather, price correlation across time periods is found, and a popular way to describe these price dynamics is to model it as a mean reverting process. Thus, in this contribution we will respectively extend common i.i.d. price models from operations management studies and will additionally consider the effect of correlation between demand and price. In this paper, we provide a managerial analysis showing the effects of demand and spot market price correlations on the optimal procurement policy and provide managerial insights. We model the combined sourcing problem as a stochastic dynamic optimization problem and analyze the optimal procurement strategy by means of stochastic dynamic programming. The behavior of the optimal policy confirmed several previous assumptions, though some interesting and important managerial consequences arise due to demand and price correlations. Based on the policy analysis, a numerical study will reveal to which extent inobservance or misspecification of an existing level of correlation might result in performance losses in operational decision making. These observations play an important role under the trend of increasing volatility and dynamic changes on the spot market but also in the customer’s behavior

Optimizing strategic sourcing in the healthcare supply chain with consideration of physician preference and vendor scorecards

This research focuses on the design of a procurement model for expensive medical supplies in a healthcare supply chain. A deterministic optimization model generates recommendations for optimal purchases of products in a given planning period. The model combines common concepts of supply chain procurement such as leveraging tiered pricing, ensuring supply base diversity with phenomena unique to healthcare supply chain such as consideration of physician preference for products. The deterministic optimization model minimizes total spend over a chosen planning period with consideration of four key decision parameters: Physician preference requirements (which are imposed as rules on product substitutability), Upper limits on vendor market share to ensure a suitably diverse supply base Vendors’ performance scores to impose standards for product pricing, quality, service, etc. Quantity discount rebate parameters for bulk purchasing to help contain medical costs The optimization model reveals the extent to which higher product substitutability and lower supply base diversity may help hospitals reduce total procurement costs. Experiments with the optimization model also reveal the potential consequences of rater biases in vendor scorecards on procurement cost. The various parameter combinations listed above may be used in negotiating contracts for better pricing. In summary, this research addresses questions pertinent to healthcare supply chains concerning the possible cost of physician preference for products, the impact of subjective scorecards on procurement costs, the effect of planning period on procurement plans, and the cost of vendor diversity

Supply Chain Management: Supplier Performance and Firm Performance

This research examines the relationship between supply chain management (SCM) practices, supplier performance, and company performance. The results provide empirical evidence that selected purchasing practices and customer relation practices are strongly ssociated with the perceived financial and market success of firms responding to the survey

Inventory Management and Financial Hedging of Storable Commodities

Under revision for resubmitting to Management Science</p

Electronic Part Total Cost Of Ownership And Sourcing Decisions For Long Life Cycle Products

The manufacture and support of long life cycle products rely on the availability of suitable parts from competent suppliers which, over long periods of time, leaves parts susceptible to a number of possible long-term supply chain disruptions. Potential supply chain failures can be supplier-related (e.g., bankruptcy, changes in manufacturing process, non-compliance), parts-related (e.g., obsolescence, reliability, design changes), logistical (e.g., transportation mishaps, natural disasters, accidental occurrences) and political/legislative (e.g., trade regulations, embargo, national conflict). Solutions to mitigating the risk of supply chain failure include the strategic formulation of suitable part sourcing strategies. Sourcing strategies refer to the selection of a set of suppliers from which to purchase parts; sourcing strategies include sole, single, dual, second and multi-sourcing. Utilizing various sourcing strategies offer one way of offsetting or avoiding the risk of part unavailability (and its associated penalties) as well as possible benefits from competitive pricing. Although supply chain risks and sourcing strategies have been extensively studied for high-volume, short life cycle products, the applicability of existing work to long life cycle products is unknown. Existing methods used to study part sourcing decisions in high-volume consumer oriented applications are procurement-centric where cost tradeoffs on the part level focus on part pricing, negotiation practices and purchase volumes. These studies are commonplace for strategic part management for short life cycle products; however, conventional procurement approaches offer only a limited view for parts used in long life cycle products. Procurement-driven decision making provides little to no insight into the accumulation of life cycle cost (attributed to the adoption, use and support of the part), which can be significantly larger than procurement costs in long life cycle products. This dissertation defines the sourcing constraints imposed by the shortage of suppliers as a part becomes obsolete or is subject to other long-term supply chain disruptions. A life cycle approach is presented to compare the total cost of ownership of introducing and supporting a set of suppliers, for electronic parts in long life cycle products, against the benefit of reduced long-term supply chain disruption risk. The estimation of risk combines the likelihood or probability of long-term supply chain disruptions (throughout the part's procurement and support life within an OEM's product portfolio) with the consequence of the disruption (impact on the part's total cost of ownership) to determine the "expected cost" associated with a particular sourcing strategy. This dissertation focuses on comparing sourcing strategies used in long life cycle systems and provides application-specific insight into the cost benefits of sourcing strategies towards proactively mitigating DMSMS type part obsolescence

Procurement and strategy in manufacturing firms

The strategic role of the Procurement function in manufacturing firms has received increased attention in the literature over the past two decades. Before the 1970s, the supply environment was seen to be stable for most firms, with no particular strategic opportunities or threats. Procurement was treated as an administrative or service function. The oil crisis in the early 1970s changed the situation, bringing in its wake acute inflation and material shortages. The 1980s saw a revolution in manufacturing with the advent of JIT, increased automation and global operations. Theoretical researchers saw the potential for a proactive and strategic role for the Procurement function. This was, however, not reflected in empirical research, which failed to find consistent evidence of firms considering Procurement as strategic. This thesis addresses the gap between precept and practice evident in the literature. A major criticism of the empirical literature is the treatment of the strategic (value) activities on the supply side and the activities of the Procurement department as synonymous. This thesis questioned that view and made a distinction between the two activities. A theoredcal framework was built up from the literature to identify the contexts in which Supply considerations would be strategic. Propositions were generated which allowed for strategic Supply activities both through the Procurement department as well as outside it. The empirical work looked at 25 UK manufacturing firms through the case study approach. The cases were scrutinised for evidence of strategic activities on the supply side, as well as the strategic importance of the Procurement department. The results confirmed that (1) Supply considerations were strategic for a majority of firms. (2) Strategic consideration of Supply depended on a number of contingent variables.(3) Strategic Supply activities were not necessarily reflected in the strategic importance given to the Procurement department

A study on options hedge against purchase cost fluctuation in supply contracts.

He, Huifen.Thesis (M.Phil.)--Chinese University of Hong Kong, 2008.Includes bibliographical references (leaves 44-48).Abstracts in English and Chinese.Chapter 1 --- Introduction --- p.1Chapter 1.1 --- Motivation --- p.1Chapter 1.2 --- Literature Review --- p.4Chapter 1.2.1 --- Supply Contracts under Price Uncertainty --- p.5Chapter 1.2.2 --- Dual Sourcing --- p.6Chapter 1.2.3 --- Risk Aversion in Inventory Management --- p.6Chapter 1.2.4 --- Hedging Operational Risk Using Financial Instruments --- p.7Chapter 1.2.5 --- Financial Literature --- p.9Chapter 1.3 --- Organization of the Thesis --- p.10Chapter 2 --- A Risk-Neutral Model --- p.12Chapter 2.1 --- Framework and Assumptions --- p.12Chapter 2.2 --- "Price, Forward and Convenience Yield" --- p.14Chapter 2.2.1 --- Stochastic Model of Price --- p.14Chapter 2.2.2 --- Marginal Convenience Yield --- p.16Chapter 2.3 --- Optimality Equations --- p.17Chapter 2.4 --- The Structure of the Optimal Policy --- p.21Chapter 2.4.1 --- One-period. Optimal Hedge Decision Rule --- p.21Chapter 2.4.2 --- One-period Optimal Orderings Decision Rule --- p.23Chapter 2.4.3 --- Optimal Policy --- p.24Chapter 3 --- A Risk-Averse Model --- p.28Chapter 3.1 --- Risk Aversion Modeling and Utility Function --- p.28Chapter 3.2 --- Multi-Period Inventory Modelling --- p.31Chapter 3.3 --- Exponential Utility Model --- p.33Chapter 3.4 --- Optimal Ordering and Hedging Policy for Multi-Period Problem --- p.37Chapter 4 --- Conclusion and Future Research --- p.40Bibliography --- p.44Chapter A --- Appendix --- p.49Chapter A.l --- Notation --- p.49Chapter A.2 --- K-Concavity --- p.5

Procurement risk management in a petroleum refinery.

We analyze a petroleum refinery's procurement strategy, explaining how risk management affects optimal sourcing from long-term, spot, and swap contracts. We use time series analysis to model the interaction between petroleum prices, transportation costs, and gross product worth. These models are then used to generate the scenarios incorporated in the stochastic program applied to compute the conditional value-at-risk. We prove the necessary and sufficient conditions for the optimal procurement and risk management strategies, and show that risk aversion can be better represented by the weighted average between expected profit and conditional value-at-risk, deriving the respective ISO curves. We estimate that an increase in the degree of risk aversion decreases the use of swap contracts. Our model is applied to the analysis of a refinery based in Singapore. Using regression analysis, we show we cannot reject the hypothesis of a statistically significant relationship between the way Saudi Arabia prices the long-term contracts and the shape of the forward curve. We then study how risk aversion influences the procurement strategies, profitability, and risk exposure of the refinery. Finally, we analyze the pricing of long-term (forward) contracts by Saudi Arabia, and study how the country could benefit from a different pricing policy

Essays on Global Sourcing under Uncertainty

In this dissertation, we study the sourcing policies of global corporations and determine the key drivers of the procurement decisions under different types of uncertainties. The first essay explores the impact of exchange-rate and demand uncertainty on sourcing decisions of a multinational firm which engages in global sourcing through capacity reservation contracts. The focus of this essay is cost, which is known to be the main driver of global sourcing practices. We investigate the impact of cost uncertainty caused by exchange-rate fluctuations on procurement decisions, and identify the conditions that result in single and dual sourcing policies. Our analysis indicates that although cost is an order qualifier when exchange rate is considered deterministic, lower expected sourcing cost is neither necessary nor sufficient to source from a supplier under exchange-rate uncertainty. The second essay examines sourcing and pricing decisions of an agricultural processor encountering yield uncertainty of the agricultural input required for its offered specialty product and the price uncertainty of the competing commercial product. We show that uncertainty gives rise to a conservative sourcing policy which would never emerge in a deterministic setting. While both studies highlight the significant impact of uncertainty on the business decisions and performance, they demonstrate that the effect of uncertainty may take opposite directions contingent upon the business environment and the type of uncertainty. The operational environment studied in the first essay, provides an opportunity for the firm to benefit from exchange-rate fluctuations, whereas the variation in supply and the market price of the competing product are shown to diminish the firm’s expected profit in the agricultural setting studied in the second essay. Demonstrating the opposing behavior under different forms of uncertainty, this study recommends managers to think deeply about the impact of uncertainty on their businesses. It also provides various forms of prescriptions to mitigate risk and operate effectively under each uncertainty