Flexible and Risk-Sharing Supply Contracts Under Price Uncertainty
We study supply contracts for deterministic demand but in an environment of uncertain prices. We develop valuation methodologies for different types of supply contracts. A "time-inflexible contract" requires the firm to specify not only how many units it will purchase, but also the timing of the purchase. A "time-flexible contract" allows the firm to specify the purchase amount over a given period of time without specifying the exact time of purchase. Other than time flexibility, the suppliers may offer "quantity flexibility" to the firm as well, i.e., purchase quantities could be within a prespecified quantity window. Finally, "risk-sharing" features can be incorporated in the contract in terms of the purchase price that the firm eventually pays to a supplier. Within a prespecified price window the firm pays the realized price, but outside of it the firm shares, in an agreed way, added costs or benefits. Given the structure of a supply contract, we study the firm's decision when to purchase and how many units in each purchase such that the expected net present value of the purchase cost plus inventory holding cost is minimized. We discuss optimal purchasing strategies for both time-flexible and time-inflexible contracts with risk-sharing features. Other interesting results include the analysis of two-supplier sourcing environments and the exploitation of quantity flexibility in such contracts. Our discussion illustrates how time flexibility, quantity flexibility, supplier selection, and risk sharing, when carefully exercised can effectively reduce the sourcing cost in environments of price uncertainty.
Volume (Year): 45 (1999)
Issue (Month): 10 (October)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nelson, Daniel B & Ramaswamy, Krishna, 1990. "Simple Binomial Processes as Diffusion Approximations in Financial Models," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 393-430.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Telser, Lester G, 1981. "Why There Are Organized Futures Markets," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 1-22, April.
- Sriram Dasu & José de la Torre, 1997. "Optimizing an International Network of Partially Owned Plants Under Conditions of Trade Liberalization," Management Science, INFORMS, vol. 43(3), pages 313-333, March.
- João L. Assunção & Robert J. Meyer, 1993. "The Rational Effect of Price Promotions on Sales and Consumption," Management Science, INFORMS, vol. 39(5), pages 517-535, May.
- Davis, Edward W., 1992. "Global outsourcing: Have U.S. managers thrown the baby out with the bath water?," Business Horizons, Elsevier, vol. 35(4), pages 58-65.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:45:y:1999:i:10:p:1378-1398. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.