Optimal Dynamic Procurement Policies for a Storable Commodity with L\'evy Prices and Convex Holding Costs

In this paper we study a continuous time stochastic inventory model for a commodity traded in the spot market and whose supply purchase is affected by price and demand uncertainty. A firm aims at meeting a random demand of the commodity at a random time by maximizing total expected profits. We model the firm's optimal procurement problem as a singular stochastic control problem in which controls are nondecreasing processes and represent the cumulative investment made by the firm in the spot market (a so-called stochastic "monotone follower problem"). We assume a general exponential L\'evy process for the commodity's spot price, rather than the commonly used geometric Brownian motion, and general convex holding costs. We obtain necessary and sufficient first order conditions for optimality and we provide the optimal procurement policy in terms of a "base inventory" process; that is, a minimal time-dependent desirable inventory level that the firm's manager must reach at any time. In particular, in the case of linear holding costs and exponentially distributed demand, we are also able to obtain the explicit analytic form of the optimal policy and a probabilistic representation of the optimal revenue. The paper is completed by some computer drawings of the optimal inventory when spot prices are given by a geometric Brownian motion and by an exponential jump-diffusion process. In the first case we also make a numerical comparison between the value function and the revenue associated to the classical static "newsvendor" strategy.Comment: 28 pages, 3 figures; improved presentation, added new results and section

The impact of coordination and information on transport procurement

Transport cost is second in importance after production cost in industry. It is the purpose of the present paper to study the impact of information sharing and contractual instruments between a supply chain and its transport suppliers. After reviewing the literature, we propose a model to measure the benefits in terms of transport cost and standard deviation of transport cost. We evaluate three scenarios over one period reiterated for a shipper carrier two-echelon model with a mix of long- term and short-term procurement strategies: perfect information, asymmetric information and private information at one level of the supply chain. We evaluate the transfer in rent between carrier and shipper according to the information known and give some insights on optimal contract parameters.Supply chain management, coordination, contracts, information sharing, game theory, mechanisms

A decision model for natural oil buying policy under uncertainty

A manufacturer, in a fast moving consumer goods industry, buys Natural oils from a number of oil suppliers world-wide. The prices of these oils are the major raw material cost in producing the consumer goods, which are also sold world-wide. The volatility in the international prices of the Natural oils has signi¯cant impact on the planning and budgets decisions. Since the oils are bought and the ¯nished products are sold in markets throughout the world, the manufacturer is exposed to a variety of market uncertainties and the resulting risks. These uncertainties are the raw material prices, the demand and the therefore the selling prices for the finished goods- all of which influence the profitability of the manufacturing firm. The risks can be minimised by entering into futures contract of appropriate duration, that is, by following a schedule of "forward"' purchase of oil (with specific series of future delivery dates) with the oil suppliers. We formulate this problem as a two-stage Stochastic Program (SP) using the futures and the spot prices for the Natural oil. This SP model gives robust decisions that hedge against the uncertainties in the Natural oil prices and the demand for the finished products. The uncertainty in the oil prices and the demand are modelled through a scenario generator. We have constructed a decision support system (DSS) that integrates the SP model, the scenario generator and the solution algorithm. This DSS also provides the decision maker a profile of the risk and return exposures for different policies

The Fundamentals of Commodity Futures Returns

Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.

Evaluating Food Commodity Procurement Strategies

We use a case study approach to determine the primary factors affecting food manufacturers' commodity procurement decisions, as well as to examine the strategic nature of commodity procurement departments. The research fills a gap in both the commodity and procurement literature. A large literature exists on commodity marketing; however, very little exists on the topic of commodity procurement. Existing procurement literature tends to focus on non-commodity products rather than commodity products. The results suggest a model for the strategic role of commodity procurement departments within food manufacturers. The initial procurement strategy must be supply maintenance, which once accomplished, allows the commodity procurement department to progress to a profit-focused strategy, which is generally cost-based. Finally, the role of the commodity procurement department can expand by offering additional services to customers, such as designing promotional programs.Marketing,

INVENTORY AND TRANSFORMATION RISKS IN SOYBEAN PROCESSING

This study examines strategies for hedging processing operations generally and uses soybean processing as a specific example. The approach assumes a mean-variance utility function but because of the focus on hedging, the analysis concentrates on risk minimization with risk defined as the variance of the processing margin from its currently expected level. We find that risk so defined contains three components. These are (1) the risk of input/output cash price misalignment at the time of transactions, (2) the risk resulting from the firm's inability to utilize inputs and produce outputs in proportion to the mix that minimizes risk in cash market transactions, and (3) the risk of price change during the time between the purchase of inputs and the sale of outputs. The first two risk components are transformation risk while the third is inventory risk. The relationships between inventory and transformation risks were examined using daily price data from January 1, 1990 through March 23, 2000. Our analysis indicates that inventory risk is the largest of the three components, it increases in a roughly linear relationship with the temporal separation between pricing of inputs and outputs, it is the risk that is hedged with usual hedging models, and that hedging reduces this risk by a proportion of its amount. Consequently, even when hedged, processors face risks that increase with the time that separates the pricing of inputs and outputs and this risk is far larger than the risk of product transformation. In soybean processing, the proportion of risk eliminated through hedging reaches a peak for process lengths of one week with gradual declines thereafter. We also find that the risk-minimizing hedge ratios for soybean meal and soybean oil depend on the length of the anticipated hedging period.Crop Production/Industries,

Microstructure And Market Maker Price Strategies: Study Of A Tunisian Market Maker Activity

This paper provides evidence on market making behaviour of FX dealer in the Tunisian FX. It uses a complete data set that includes intra-day trades for the euro and US dollar. The sample period is 1 January 2007 to 31 December 2007. The results are consistent with the findings of the literature that used trades and inventories data. I find evidence that customer order flow has information effect on USD/TND. However, I do not find evidence that customer order flow has information effect on EUR/TND. Moreover, inter-dealer order flow has a positive effect on the market maker price strategy. I also find that the central bank intervention has positive and significant effect on dealer’s behaviour and price formation process. My study also suggests that dealer is risk aversion and his quotes flows the references quotes tendency.exchange rate, order flow, microstructure, trading