The floating contract between risk-averse supply chain partners in a volatile commodity price environment
Department of Mechanical and Industrial Engineering
Doctor of Philosophy
Das, Sanchoy K.
Bladikas, Athanassios K.
Nakayama, Marvin K.
Spot price volatility
In this dissertation, two separate but closely related decision making problems in environments of volatile commodity prices are addressed. In the first problem, a risk-averse commodity user's purchasing policy and his risk-neutral supplier's pricing decision, where the user can purchase his needs through contract with his supplier as well as directly from the spot market, are analyzed. The commodity user is assumed to be the supplier's sole client, and the supplier can always expand capacity, at a cost to the user, to accommodate the user's demand in excess of initially reserved capacity.
In the more generalized second problem, both parties (commodity user and supplier) are assumed to be risk averse, and both can directly access the spot market. In addition to making pricing decisions, the supplier is also faced with the challenge of establishing the right combination of in-house production and spot market engagements to manage her risk of exposure to spot price volatility under the contract. While the supplier has a frictionless buy and sell access to the spot market, the user can only access this market for buying purposes and incurs an access fee that is linearly increasing in the purchased volume.
In both problems, by adopting the mean-variance criterion to reflect aversion to risk, the decisions of both parties are explicitly characterized. Based on analytical results and numerical studies, managerial insights as to how changes in the model's parameters would affect each party's decisions are offered at length, and the implications of these results to the manager are discussed. A focal point for the dissertation is the consideration of a floating contract, the landing price ofwhich is contingent on the realization of the commodity's spot market price at the time of delivery. It was found that if properly designed, not only can this dynamic pricing arrangement strategically position a long-term supplier against spot market competition, but it also has the added benefit of leading to improved supply chain expected profits compared to a locked-in contract price setting. Another key finding is that when making her pricing decisions, the supplier runs the risk of overestimating the commodity user's vulnerability at higher levels of the user's aversion to risk as well as at higher volatility of spot prices.
njit-etd2010-091 (121 pages ~ 3,834 KB pdf)
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Created October 21, 2011