The role of spot market in a decentralised supply chain under random yield

Abstract

We consider a decentralised supply chain with demand uncertainty, wherein a manufacturer sells a single product that consists of two components to the end consumer through an independent distributor. Assume that one component has a random yield, the manufacturer may rely on the spot market to replenish any shortage components after the random yield is realised. We identify the optimal product order, component production and replenishment decisions under two different situations. One is the traditional arrangement that the distributor decides the product procurement quantity and the manufacturer chooses the production quantity. The other is vendor-managed inventory (VMI) arrangement in which the manufacturer is responsible for both the order and the production decisions. The results show that the role of spot market can effectively offset the negative effects from production yield's, market demand's and component spot price's variances. Consequently, the spot market leads to the cooperation between the manufacturer and the distributor, and improves the channel's overall performance, in particular under the VMI arrangement when the wholesale price is sufficiently high.

Advance booking discount in the presence of spot market

“…Hong and Lee (2013) present a decision-support system to model risks for procurement processes in the presence of spot market. Other research includes Wu, Kleindorfer, and Zhang (2002), Pei, Simchi-Levi, andTunca (2011), Ma, Yin, andGuan (2013) and Fu et al (2012). Our paper differs from the above studies in that the firm applies the ABD program to gain more information on both the demand of the final product and the spot price of the raw material.…”

The implication of capacity reservation contracts in assembly system with asymmetric demand information

“…Wang and Gerchak 2003;Gerchak and Wang 2004;Gurnani and Gerchak 2007;Granot and Yin 2008;Jiang and Wang 2007;Li, Chen, and Che 2013;Ma, Yin, and Guan 2013;Chen, Ding, and Ou 2014;Güler 2015;Oh, Sourirajan, and Ettl 2014;Guan, Ma, and Yin 2015). In particular, Wang and Gerchak (2003), Gerchak and Wang (2004) indicate that it will be interesting to incorporate asymmetric information about the demand or each firm's cost into research related to assembly system.…”

Optimal procurement of long-term contracts in the presence of imperfect spot market

“…Kouvelis et al [16] integrated sourcing decisions with financial hedging decisions to manage price risk and consumption risk of storable commodity for a risk-averse buyer, and derived optimal hedging policies for multiple period problems. Ma et al [19] investigated the optimal ordering and production decisions in a decentralized supply chain under random yield. Unfortunately, these papers assume a perfect spot market in the sense that all the transactions can be realized without uncertainties or costs.…”