Please use this identifier to cite or link to this item: https://doi.org/10.1080/07408171003670983
Title: Procurement management using option contracts: Random spot price and the portfolio effect
Authors: Fu, Q.
Lee, C.-Y.
Teo, C.-P. 
Keywords: optimization
procurement management
Stochastic programming
Issue Date: 2010
Source: Fu, Q., Lee, C.-Y., Teo, C.-P. (2010). Procurement management using option contracts: Random spot price and the portfolio effect. IIE Transactions (Institute of Industrial Engineers) 42 (11) : 793-811. ScholarBank@NUS Repository. https://doi.org/10.1080/07408171003670983
Abstract: This article considers the value of portfolio procurement in a supply chain, where a buyer can either procure parts for future demand from sellers using fixed price contracts or, option contracts or tap into the market for spot purchases. A single-period portfolio procurement problem when both the product demand and the spot price are random (and possibly correlated) is examined and the optimal portfolio procurement strategy for the buyer is constructed. A shortest-monotone path algorithm is provided for the general problem to obtain the optimal procurement solution and the resulting expected minimum procurement cost. In the event that demand and spot price are independent, the solution algorithm simplifies considerably. More interestingly, the optimal procurement cost func ion in this case has an intuitive geometrical interpretation that facilitates managerial insights. The portfolio effect, i.e., the benefit of portfolio contract procurement over a single contract procurement is also studied. Finally, an extension to a two-period problem to examine the impact of inventory on the portfolio procurement strategy is discussed. Copyright © "IIE".
Source Title: IIE Transactions (Institute of Industrial Engineers)
URI: http://scholarbank.nus.edu.sg/handle/10635/44071
ISSN: 0740817X
DOI: 10.1080/07408171003670983
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