Joint economic lot size models with warehouse financing and financial contracts for hedging stocks under different coordination policies

The rapid expansion of emerging markets, combined with the influence of hedge funds and market speculators, highly increased commodity prices. At the same time, the global economic recession and an adverse credit environment, caused the price of commodities to drop with alarming speed. This huge volatility in prices generates a significant commodity risk, which creates issues of concern for companies while determining production, procurement, and risk-mitigation strategies. The context described is particularly challenging for those companies that have limited market power, since they may hardly transfer price increases to the end customers. In this regard, we extend the inventory theory by combining the operation management with two specific financial techniques, that may allow the commodity risk mitigation. Specifically, the warehouse financing practice and the use of futures contracts are included and investigated in the traditional joint economic lot size model, under two different coordination policies, as means for hedging stocks. The decision variables are the order quantity, the number of shipments between the vendor and the buyer, and the production rate. A numerical study is also presented in order to provide managerial insights on the economic performance of the different scenarios. The paper compares also the numerical results of the two financing practices with a base model, i.e. without any kind of supply chain finance. The results highlight that both the financing practices allow to reduce the total cost of the supply chain, and that the convenience of one practice, over the other, strictly depends on the relevant parameters distinguishing the case study.