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Wu et al. (2002) is arguably the earliest research on the integration of supply contract and spot market. They consider a setting with one seller and one or more buyers in a capital-intensive industry. In addition to the long-term bilateral contract between the seller and the buyers, both of them are allowed to sell excess capacity or purchase necessary outputs from the spot market to satisfy the demand. In their model, the option-type contract has two-part fee structure, the unit reservation cost and the unit execution cost if the capacity is called. Optimal solutions are derived in a von Stackelberg game, in which the seller’s optimal bidding strategy and the buyers’ optimal contracting strategy are both determined. Based on transaction cost economics (TCE), Kleindorfer and Wu (2003) provide a general analytic framework and survey the research and practice on the use of options in the B2B markets. Since then, many studies have been done to investigate the effect of portfolio procurement on supply chain performance. Together, they strive to address the following questions.
Key Terms in this Chapter
Futures Market: A financial market where people can trade standardized futures contracts that entitle the buyer to purchase certain products at specified price and agreeable delivery time in the future.
Portfolio Procurement Policy: A combination of various supply sources, such as bilateral supply contracts, spot markets, futures markets, and option contracts, to achieve the optimal supply chain performance.
Risk-hedging Supply Chain: A resilient supply chains that are able to hedge against supply, demand, and price risks by applying a variety of financial and contractual tools.
Option Contract: A contract that allows the holder to buy or sell an underlying commodity or product at a given price. Option contract significantly reduces the price risks in the spot market.
Equilibrium Price: The price at which there is no tendency for it to change. It is attained when the quantity demanded equals quantity supplied.
Spot Market: A commodity or product market in which goods are sold for cash and delivered immediately. In the spot market, prices are settled in cash on the spot at current market prices.
Bilateral Supply Contract: An agreement between a supplier and a buyer under mutually agreeable terms for a specified period of time. The bilateral supply contract is usually long-term and may have various special contract clauses.