Optimal procurement of long-term contracts in the presence of imperfect spot market |
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| Institution: | 1. The School of Management, Xi’an Jiaotong University, Xi’an, PR China;2. Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, PR China;3. Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, PR China;1. Dpto. de Organización Industrial y Gestión de Empresas I, Universidad de Sevilla, Spain;2. Dpto. de Economía, Métodos Cuantitativos e Historia Económica, Universidad Pablo de Olavide, Ctra. de Utrera Km.1, 41013 Sevilla, Spain;3. Dpto. de Economía Aplicada III, Universidad de Sevilla, Spain;1. Department of Statistics and Operations Research, University of Murcia, Campus de Espinardo, 30100-Espinardo, Murcia, Spain;2. Department of Business Administration, Law and Social Sciences, San Antonio Catholic University, Campus de los Jerónimos, 30107-Guadalupe, Murcia, Spain;1. Foisie School of Business, Worcester Polytechnic Institute, Worcester, MA 01609, USA;2. D?Amore McKim School of Business, Northeastern University, Boston, MA 02115, USA;1. University of Southampton, United Kingdom;2. University of Valencia, Spain |
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| Abstract: | B2B spot market has grown rapidly and become an effective trading channel for commodity products. Besides long-term contract procurement from conventional suppliers (forward and option), a buyer can procure or sell commodities at any time in B2B spot market to adjust her inventory level. However, spot prices are generally volatile and the market is imperfect in the sense that spot trading may be realized with uncertainty in a given period of time and often comes with extra transaction cost. This paper considers a commodity buyer who can order forward and option contracts in advance and trade in a B2B spot market when spot price and demand are observed stochastically. Based on a single-period newsvendor model, we discuss three optimal order strategies and derive respective expected profits when the buyer is risk-neutral. The sensitivity of purchase costs, market liquidity and transaction cost is investigated. We also compare the optimal expected profits for different strategies to illustrate the effects of the two long-term contracts in the presence of the B2B spot market. We then extend our model to a multi-period setting and derive the optimal strategy. Finally, we numerically compute the optimal order strategy for a risk-averse buyer and analyze the impact of spot market, risk aversion, as well as the correlation between customer demand and spot price. |
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| Keywords: | Supply chain management Forward contract Option contract Procurement B2B spot market |
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