Premium
A Portfolio Approach to Procurement Contracts
Author(s) -
MartínezdeAlbéniz Victor,
SimchiLevi David
Publication year - 2005
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/j.1937-5956.2005.tb00012.x
Subject(s) - portfolio , forward contract , spot market , procurement , spot contract , profit (economics) , application portfolio management , business , forward market , microeconomics , portfolio optimization , project portfolio management , industrial organization , economics , finance , marketing , project management , electricity , management , electrical engineering , engineering , futures contract
The purpose of this paper is to develop a general framework for supply contracts in which portfolios of contracts can be analyzed and optimized. We focus on a multi‐period environment with convex contract, spot market, and inventory holding costs. We specialize the model to the case of a portfolio consisting of option contracts. We characterize the optimal replenishment policy and show that it has a simple structure. Namely, the use of every different option contract and the spot market is dictated by a modified base‐stock policy. In addition, we derive conditions to determine when an option is relatively attractive compared to other options or the spot market. Finally, we present our computational study, where we report the sensitivity of the results to the parameters of the model. Our experiments indicate that portfolio contracts not only increase the manufacturer's expected profit, but can also reduce its financial risk.