Optimal Procurement Strategies Of Raw Materials Under Spot Price Uncertainty

Our economy is getting increasingly close to the world economy with the rapid development of economic globalization, and every enterprise’s operations in our country are affected by the international market. The global economy is changing rapidly, so every enterprise is facing more and more uncertainties. The supply and demand balance of raw materials changes frequently as it is influenced by different factors, such as the international political situation, natural disasters, and currency exchange rates. Therefore, raw material price fluctuates a lot, which brings a great risk to procurement activities, and many manufacturers fall into trouble. The procurement cost of raw materials generally accounts for60-80%of total revenue in the manufacturing industry. The fluctuation of raw material price influences the stability of profits, so many enterprises put a lot of emphasis on adopting strategies to control procurement cost in order to increase their competitiveness. In this thesis optimal procurement strategies for a risk-averse manufacturer under uncertainty are investigated.After making a summary of current researches on procurement risk management, a framework consisted of four purchasing scenarios is built, depending on whether the purchasing contracts and the corresponding financial tools of raw materials exist. First the optimal procurement strategy in one period is discussed. Mean-variance utility and expected utility theories are used to characterize a decision maker’s (DM’s) risk-averse behavior, and the risk management theory is used to analyze a DM’s mixed procurement strategy and hedging strategy. Then the optimal procurement strategy in multiple period is discussed from both discrete-time and continuous-time perspectives. Stochastic dynamic programming is used to study the discrete-time situation, and the optimal control method is used to study the continuous-time situation.The main conclusions of this thesis are as follows: (1) A manufacturer utilizes a long-term contract or an option contract to order raw materials from a supplier, and he also buys materials from a spot market. An optimal mixed strategy is obtained for the manufacturer by building a purchasing model. When combining a long-term contract and a spot market for purchase, the relationship between the optimal ordering quantity via a long-term contract and the risk aversion degree of a DM or the volatility of spot price depends on whether the expected spot price or the price of a long-term contract is bigger. And the optimal ordering quantity via a long-term contract increases as the expected spot price becomes higher.When combining an option contract and a spot market for purchase, the relationship between the optimal ordering quantity via an option contract and the risk aversion degree of a DM is affected by the option premium. The mean-variance utility of a manufacturer is improved after adopting a mixed strategy.(2) If the corresponding financial tools of a raw material exist, a manufacturer can utilize futures or option contracts to hedge the procurement risk. When futures contracts exist, the relationship between the optimal purchasing quantity (via a futures contract or a long-term contract) and the risk aversion degree of a DM or the volatility of spot price also depends on whether the expected spot price or the price of a contract is bigger. When option contracts exist, the optimal purchasing quantities via an option contract and a long-term contract are influenced differently by the risk aversion degree of a DM or the volatility of spot price. If the purchasing quantity via an option contract increases, the purchasing quantity via a long-term contract decreases. An empirical method is used to analyze the equilibrium relationship between the spot price and futures price of copper. And the optimal hedge ratio of copper is obtained in the situation of imperfect hedge.(3) When a manufacturer utilizes a long-term contract and a spot market for a multi-period purchase, the optimal procurement strategy in multiple periods is analyzed. In a two-period reduced model, it is demonstrated that a DM’s procurement strategies are different when the price of a long-term contract exhibits different trends. If the contract price has a downward trend, the purchasing quantity in the first period only satisfies the demand at the end of the first period. If the contract price has an upward trend, the purchasing quantity in the first period is greater than the sum of the demands of both periods. If the contract price is stable, a myopic procurement strategy will be used.(4) When both purchasing contracts and financial tools don’t exist, only the spot market is used for purchase. If a manufacturer faces a single demand, an optimal inventory control policy is obtained. Then the approximate optimal strategy of discrete-time procurement is investigated. A risk-averse DM uses a decentralized procurement strategy, while a risk-neutral DM uses a bang-bang procurement strategy. The optimal strategy in multiple periods depends on whether the utility reduction of buying a raw material or the utility reduction of using inventory is bigger. Finally, the difference of total purchasing costs between a risk-averse DM and a risk-neutral DM is compared. The purchasing cost of a risk-averse DM is not always lower than that of a risk-neutral DM; however, the total purchasing cost can be averaged by a decentralized procurement strategy.