Procurement management using option contracts: random spot price and the portfolio effect

• DOI: 10.1080/07408171003670983
• Publication Date: 2010-09-16T12:30:59Z
• Authors: Qi Fu; Chung-Yee Lee; Chung-Piaw Teo
• Keywords: Spot market; Forward contract

This article considers the value of portfolio procurement in a supply chain, where buyer can either procure parts for future demand from sellers using fixed price contracts or, option or tap into market spot purchases. A single-period problem when both product and are random (and possibly correlated) is examined optimal strategy constructed. shortest-monotone path algorithm provided general to obtain solution resulting expected minimum cost. In event that independent, simplifies considerably. More interestingly, cost function this case has an intuitive geometrical interpretation facilitates managerial insights. The effect, i.e., benefit contract over single also studied. Finally, extension two-period examine impact inventory on discussed.