Procurement management using option contracts: unfulfilled demand

Abstract

This thesis deals with the procurement management problem in a supply chain from the perspective of the buyer. In this environment, the buyer faces uncertain demand and spot market price and has to procure in advance from either sellers or the spot market. The main new contribution of this research is considering another possibility while procuring: not fulfilling all the demand by paying a penalty cost. A single-period and two stage model is presented with the chance of considering correlation between demand and spot market. Due to the similarities between the research proposed by Fu. et. al. [1] and the model presented here comparisons are made during this work. More interestingly, several studies are developed as well as a solution proposal for the two stages. Furthermore, a practical meaning is given to the model by performing a case studio with real data from the spot market with two different types of commodities: iron ore and steel. To end with, this thesis introduces the concept of not fulfilling the demand to the discount-off of market price model, presenting a primarily formulation of a new joint model and opening a new line of research.