Journal article
Purchasing decisions under stochastic prices: Approximate solutions for order time, order quantity and supplier selection
Annals of operations research, Vol.201(1), pp.287-305
12/2012
Handle:
https://hdl.handle.net/2376/104216
Abstract
This paper analyzes purchasing strategies for retailers regarding the best timing and amount of purchases when operating under combined timing and quantity flexibility contracts in an environment of uncertain prices. To decrease the computational complexity and make the procedure adaptable to the case of multiple suppliers, we introduce, analyze, and compare a “time strategy” and a “target strategy” and then develop a hybrid “adaptive target strategy” to facilitate and improve the purchasing decision for the case of option contracts with generally rising prices. The adaptive target strategy is simpler and more intuitive than the traditional binomial lattice method, while the risk of failing to meet a target profit can also easily be calculated. We then extend the solution procedure to maximize expected profits in an environment of selecting among multiple suppliers with potentially different price processes, and we further provide risk analysis to help determine a good estimate for the number of option contracts from different suppliers to generate in order to create adequate risk protection. Numerical analysis demonstrates how the number of candidate suppliers impacts the expected profit and the risk. Monte Carlo simulation results demonstrate that the developed solution procedures provide satisfying outcomes and that the calculation is fast, even for multiple-dimension and multiple-supplier cases.
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Details
- Title
- Purchasing decisions under stochastic prices: Approximate solutions for order time, order quantity and supplier selection
- Creators
- Xiangling Hu - Management Department, Seidman College of Business Grand Valley State University Grand Rapids MI 49504-6431 USACharles Munson - Department of Finance and Management Science, College of Business Washington State University P.O. Box 644746 Pullman WA 99164-4746 USAStergios Fotopoulos - Department of Finance and Management Science, College of Business Washington State University P.O. Box 644746 Pullman WA 99164-4746 USA
- Publication Details
- Annals of operations research, Vol.201(1), pp.287-305
- Academic Unit
- Finance and Management Science, Department of
- Publisher
- Springer US; Boston
- Identifiers
- 99900547073701842
- Language
- English
- Resource Type
- Journal article