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See discussions, stats, and author profiles for this publication at: Strategic procurement from forward contract and spot market Article in Industrial Management & Data Systems · June 2014 DOI: 10.1108/IMDS-07-2013-0308 CITATIONS 8 READS 523 3 authors , including: Some of the authors of this publication are also working on these related projects: Dynamic MRO scheduling research based on nonlinear age deterioration mechanism View project Dynamic MRO scheduling research based on nonlinear age deterioration mechanism View project C. K. M. Lee The Hong Kong Polytechnic University 185 PUBLICATIONS 2,799 CITATIONS SEE PROFILE Danping Lin Nanyang Technological University 29 PUBLICATIONS 233 CITATIONS SEE PROFILE All content following this page was uploaded by Danping Lin on 03 December 2015. The user has requested enhancement of the downloaded file.
Strategic procurement from forward contract and spot market C.K.M. Lee Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hong Kong, China Danping Lin Logistics Engineering College, Shanghai Maritime University, Shanghai, China, and Rohan Pasari School of Mechanical and Aerospace Engineering, Nanyant Technological University, Singapore Abstract Purpose – The purpose of this paper is to formulate procurement strategies and determine the optimal procurement quantity in order to maximize profit through forward contracting and the spot market. Design/methodology/approach – The procurement process is modeled at various stages along a time horizon from the perspective of the buyer, with consideration of uncertain yields, stochastic demand and dynamic spot market prices. Monte Carlo simulation based experiments were conducted to figure out the best procurement quantity for five different scenarios. The framework was developed to understand the impact of different uncertain variables on a firm’s profit. A case study was carried out in a steel making company in India, with real data. Findings – The results indicate that the proposed approach enables buyers to achieve higher profits under volatile demand conditions. In the case study, it was found that the profit is higher for the spot market than for contract pricing if there is significant demand and spot price volatility. Originality/value – This research considers not only demand uncertainty but also supply uncertainty in the procurement process, and profit analysis was carried out to enable an enterprise to set up a procurement plan by using forward contracting and the spot market. This study should also increase awareness in both academia and industry on the opportunities of using the spot market to enhance flexibility and to mitigate risk in the procurement process.

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