Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty
<p><strong>Purpose:</strong> The purpose of our paper is to analyze optimal purchasing strategies when a manufacturer can buy raw materials from a long-term contract supplier and a spot market under spot price uncertainty.</p> <p><strong>Design/methodology/approac...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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OmniaScience
2015-09-01
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| Series: | Journal of Industrial Engineering and Management |
| Subjects: | |
| Online Access: | http://www.jiem.org/index.php/jiem/article/view/1289 |
| _version_ | 1817993100709068800 |
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| author | Qiao Wu Andy Chen |
| author_facet | Qiao Wu Andy Chen |
| author_sort | Qiao Wu |
| collection | DOAJ |
| description | <p><strong>Purpose:</strong> The purpose of our paper is to analyze optimal purchasing strategies when a manufacturer can buy raw materials from a long-term contract supplier and a spot market under spot price uncertainty.</p> <p><strong>Design/methodology/approach:</strong> This procurement model can be solved by using dynamic programming. First, we maximize the DM’s utility of the second period, obtaining the optimal contract quantity and spot quantity for the second period. Then, maximize the DM’s utility of both periods, obtaining the optimal purchasing strategy for the first period. We use a numerical method to compare the performance level of a pure spot sourcing strategy with that of a mixed strategy.</p> <p><strong>Findings:</strong> Our results show that optimal purchasing strategies vary with the trend of contract prices. If the contract price falls, the total quantity purchased in period 1 will decrease in the degree of risk aversion. If the contract price increases, the total quantity purchased in period 1 will increase in the degree of risk aversion. The relationship between the optimal contract quantity and the degree of risk aversion depends on whether the expected spot price or the contract price is larger in period 2. Finally, we compare the performance levels between a combined strategy and a spot sourcing strategy. It shows that a combined strategy is optimal for a risk-averse buyer.</p> <p><strong> </strong></p> <p><strong>Originality/value:</strong> It’s challenging to deal with a two-period procurement problem with risk consideration. We have obtained results of a two-period procurement problem with two sourcing options, namely contract procurement and spot purchases. Our model incorporates the buyer’s risk aversion factor and the change of contract prices, which are not addressed in early studies.</p> |
| first_indexed | 2024-04-14T01:35:15Z |
| format | Article |
| id | doaj.art-d9330440c3214325bf2d92060a7888e8 |
| institution | Directory Open Access Journal |
| issn | 2013-8423 2013-0953 |
| language | English |
| last_indexed | 2024-04-14T01:35:15Z |
| publishDate | 2015-09-01 |
| publisher | OmniaScience |
| record_format | Article |
| series | Journal of Industrial Engineering and Management |
| spelling | doaj.art-d9330440c3214325bf2d92060a7888e82022-12-22T02:20:00ZengOmniaScienceJournal of Industrial Engineering and Management2013-84232013-09532015-09-01841087110210.3926/jiem.1289378Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertaintyQiao Wu0Andy Chen1Zhejiang Wanli UniversityZhejiang University<p><strong>Purpose:</strong> The purpose of our paper is to analyze optimal purchasing strategies when a manufacturer can buy raw materials from a long-term contract supplier and a spot market under spot price uncertainty.</p> <p><strong>Design/methodology/approach:</strong> This procurement model can be solved by using dynamic programming. First, we maximize the DM’s utility of the second period, obtaining the optimal contract quantity and spot quantity for the second period. Then, maximize the DM’s utility of both periods, obtaining the optimal purchasing strategy for the first period. We use a numerical method to compare the performance level of a pure spot sourcing strategy with that of a mixed strategy.</p> <p><strong>Findings:</strong> Our results show that optimal purchasing strategies vary with the trend of contract prices. If the contract price falls, the total quantity purchased in period 1 will decrease in the degree of risk aversion. If the contract price increases, the total quantity purchased in period 1 will increase in the degree of risk aversion. The relationship between the optimal contract quantity and the degree of risk aversion depends on whether the expected spot price or the contract price is larger in period 2. Finally, we compare the performance levels between a combined strategy and a spot sourcing strategy. It shows that a combined strategy is optimal for a risk-averse buyer.</p> <p><strong> </strong></p> <p><strong>Originality/value:</strong> It’s challenging to deal with a two-period procurement problem with risk consideration. We have obtained results of a two-period procurement problem with two sourcing options, namely contract procurement and spot purchases. Our model incorporates the buyer’s risk aversion factor and the change of contract prices, which are not addressed in early studies.</p>http://www.jiem.org/index.php/jiem/article/view/1289price risk, risk aversion, spot market, combined strategy |
| spellingShingle | Qiao Wu Andy Chen Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty Journal of Industrial Engineering and Management price risk, risk aversion, spot market, combined strategy |
| title | Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty |
| title_full | Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty |
| title_fullStr | Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty |
| title_full_unstemmed | Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty |
| title_short | Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty |
| title_sort | optimal combined purchasing strategies for a risk averse manufacturer under price uncertainty |
| topic | price risk, risk aversion, spot market, combined strategy |
| url | http://www.jiem.org/index.php/jiem/article/view/1289 |
| work_keys_str_mv | AT qiaowu optimalcombinedpurchasingstrategiesforariskaversemanufacturerunderpriceuncertainty AT andychen optimalcombinedpurchasingstrategiesforariskaversemanufacturerunderpriceuncertainty |