Procurement has recently been recognized as a key determinant of bottom line performance. As a result, procurement strategies are critical to the competitiveness in the global marketplace. Facing the challenge of coping with demand and supply risks, companies have started incorporating a portfolio procurement strategy that comprises a spectrum of supply sources at different levels of commitment and risk sharing with their suppliers, e.g., fixed price contracts, option contracts and the spot market. This dissertation addresses extensively the issues arising from this portfolio approach to procurement risk management. In the following we briefly introduce three major models studied in this thesis....[ Read more ]

Procurement has recently been recognized as a key determinant of bottom line performance. As a result, procurement strategies are critical to the competitiveness in the global marketplace. Facing the challenge of coping with demand and supply risks, companies have started incorporating a portfolio procurement strategy that comprises a spectrum of supply sources at different levels of commitment and risk sharing with their suppliers, e.g., fixed price contracts, option contracts and the spot market. This dissertation addresses extensively the issues arising from this portfolio approach to procurement risk management. In the following we briefly introduce three major models studied in this thesis.

In a single period setting, when both the demand and spot market price mechanism are random, we characterize the optimal portfolio sourcing strategy that minimizes the expected system cost. We use this model to explore the interaction between the contract and spot markets, analyze the cost impact of the portfolio approach as well as its benefits over single sourcing. This model also allows us to address many other aspects of the portfolio procurement management, for instance, how the volatility of demand and spot price affects the procurement strategy and what is the effect of the demand-price correlation. A case study on the inventory planning of Reebok NFL replica jerseys is discussed. The problem belongs to a class of partial postponement problem where a group of end items share a common component which can be customized to produce any of the end items once demands are realized. The decision is the procurement quantity of each end item and the common component. We show how our model and solution approach can be modified to fit this practical situation.

We also propose a multi-period model to study the combined pricing and portfolio contract procurement problem. Customer demand in each period is random and price-dependent. The buyer employs a portfolio procurement strategy including both contract market and the spot market with a random spot price, and can dynamically adjust the selling price of the product to better coordinate supply with demand. The objective is to maximize the expected total profit over a finite planning horizon. We analyze the optimal joint policies, i.e., pricing, option-reservation and option-exercising policies in this setting. We also provide some qualitative relationships among these three decisions and conduct numerical studies to demonstrate the structural properties of the optimal policies and provide some managerial insights.

The third problem investigates how alternative performance measures would affect the optimal portfolio procurement decision. While the first two model adopt the expected cost (profit) performance measure, the third model uses a risk-adjusted approach motivated by the fact that many firms are concerned more with the performance against their target than the expected cost (profit). The basic settings are the same with the single period problem, but the objective is to maximize the probability of achieving a certain performance target. We develop solution procedures and provide numerical examples to compare the risk-adjusted approach with the risk-neutral approach.