Strategic procurement from forward contract and spot market

Ka Man Lee, Danping Lin, Rohan Pasari

Research output: Journal article publicationJournal articleAcademic researchpeer-review

7 Citations (Scopus)

Abstract

Purpose - The purpose of this paper is to formulate procurement strategies and determine the optimal procurement quantity in order to maximize profit through forward contracting and the spot market. Design/methodology/approach - The procurement process is modeled at various stages along a time horizon from the perspective of the buyer, with consideration of uncertain yields, stochastic demand and dynamic spot market prices. Monte Carlo simulation based experiments were conducted to figure out the best procurement quantity for five different scenarios. The framework was developed to understand the impact of different uncertain variables on a firm's profit. A case study was carried out in a steel making company in India, with real data. Findings - The results indicate that the proposed approach enables buyers to achieve higher profits under volatile demand conditions. In the case study, it was found that the profit is higher for the spot market than for contract pricing if there is significant demand and spot price volatility. Originality/value - This research considers not only demand uncertainty but also supply uncertainty in the procurement process, and profit analysis was carried out to enable an enterprise to set up a procurement plan by using forward contracting and the spot market. This study should also increase awareness in both academia and industry on the opportunities of using the spot market to enhance flexibility and to mitigate risk in the procurement process.
Original languageEnglish
Article number17112556
Pages (from-to)778-796
Number of pages19
JournalIndustrial Management and Data Systems
Volume114
Issue number5
DOIs
Publication statusPublished - 1 Jan 2014

Keywords

  • Forward contract
  • Monte Carlo simulation
  • Procurement
  • Spot market
  • Uncertainty

ASJC Scopus subject areas

  • Management Information Systems
  • Industrial relations
  • Computer Science Applications
  • Strategy and Management
  • Industrial and Manufacturing Engineering

Cite this