Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty
Abstract: 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.
Design/methodology/approach: 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.
Findings: 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.
Originality/value: 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.
Author: Qiao Wu, Andy Chen
Journal Code: jptindustrigg150024
