Economics at your fingertips  

Optimal procurement strategies for contractual assembly systems with fluctuating procurement price

Yi Yang, Jianan Wang, Youhua Chen, Zhiyuan Chen and Yanchu Liu ()
Additional contact information
Yi Yang: Zhejiang University
Jianan Wang: Zhejiang University
Youhua Chen: City University of Hong Kong
Zhiyuan Chen: Wuhan University
Yanchu Liu: Sun Yat-sen University

Annals of Operations Research, 2020, vol. 291, issue 1, No 40, 1027-1059

Abstract: Abstract We consider a multi-component assembly system that produces a single end product in order to satisfy the one-time demand at a (known) future time with an exogenous selling price. Components can be outsourced from outside suppliers with positive leadtimes under either time-inflexible or time-flexible contracts. One of these components, say component 1, faces an uncertainty in its procurement price, depending on the spot market price that is governed by a geometric Brownian motion, while the prices of other components are constant. Given supply contracts, the assembler needs to determine the procurement strategy to maximize the total expected profit that equals the expected revenue minus procurement cost, holding cost, and tardiness penalty cost. Under time-inflexible contracts, the problem is static and a variant of the classic newsvendor problem. We show that leadtime uncertainty will cause the assembler to be more conservative in procurement quantity, but more aggressive in procurement timing than if the leadtime is deterministic. For time-flexible contracts, we show that under certain conditions, the original problem is equivalent to an optimal single stopping problem whose optimal strategies follow either upward or downward base-price procurement policies. Under the general condition, we propose an efficient Monte Carlo simulation method to calculate the optimal solutions. Numerical studies also provide several interesting insights: first, both procurement quantity and profit are non-monotone in the leadtime length; second, the value of time-flexible contracts compared to time-inflexible contracts is close to zero if the price of component 1 has a decreasing trend, but otherwise significant.

Keywords: Assembly system; Supply contracts; Spot market; Monte Carlo simulation; Leadtime (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link) Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from

DOI: 10.1007/s10479-019-03314-y

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

Page updated 2021-04-03
Handle: RePEc:spr:annopr:v:291:y:2020:i:1:d:10.1007_s10479-019-03314-y