Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/188725 
Year of Publication: 
2015
Citation: 
[Journal:] Journal of Industrial Engineering and Management (JIEM) [ISSN:] 2013-0953 [Volume:] 8 [Issue:] 4 [Publisher:] OmniaScience [Place:] Barcelona [Year:] 2015 [Pages:] 1087-1102
Publisher: 
OmniaScience, Barcelona
Abstract: 
Purpose: 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.
Subjects: 
price risk
risk aversion
spot market
combined strategy
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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