Managing procurement costs and risks in supply chain networks
Date of Issue2014
School of Mechanical and Aerospace Engineering
The industrial globalization trend makes the supply chain a more and more complicated and volatile part in the manufacturing industries. Procurement planning, which is an important activity of supply chain management, should be formulated by considering both operational risk and disruptive risk in the dynamic business environment. Therefore, procurement decision making under uncertainty has attracted considerable attention in both academia and industry. There are several challenges faced by enterprises and researches in this area, one of which is how to use reactive supply (i.e. spot market) to reduce yield risk taking into account interrelated uncertainties in demand, spot price and yield. Moreover, how to best utilize supply diversification to reduce yield and demand uncertainties is also a sophisticated challenge. A third challenge is the lead time uncertainty management, which involves whether the purchasing company should control the delivery of forward contract items by itself or let the suppliers be responsible for the delivery. To address these challenges, a comprehensive study on how to make optimal procurement decisions under yield and demand uncertainty in the presence of spot market is conducted in this thesis, with the objective to reduce the impact of risks in procurement. The uncertainties of yields, spot prices and demand, and the correlations among them are taken into consideration when designing procurement plans. This thesis has evaluated the effectiveness of dealing with uncertain supply using the spot market along with the contract supplier and has modeled the dependences among all the potential uncertainties. This research also seeks high expected profits without overlooking the associated variances. Based on that, mathematical models based on a mean-variance framework are developed to obtain analytical solutions, with the risk sensitivity analysis on several key factors. The analytical expression to determine the optimal order quantity is obtained under the most general situations where commodities can be both bought and sold via the spot market. Some properties are derived to provide useful managerial insights. In addition, reference scenarios, such as pure contract (PC) sourcing and the spot market restricted for buying only (BO) or selling only (SO), are included for comparison purposes. Out of the research studies, we have achieved some accomplishments: Firstly, a novel procurement risk management (PRM) framework is proposed to help buyers make optimal ordering and delivery arrangement decisions. Secondly, it is proved that the adoption of reactive supply (e.g. spot market) could greatly increase profits and control risks within a certain level. Last but not least, the interrelated demand, spot price and yield risks in this complicated problem are modeled with closed form result obtained. Real-world industrial case studies are also conducted to complete the research work that we have undergone. During the procurement strategy design for a semi-conductor manufacturing company, optimal procurement and delivery decisions are made with the help of the proposed integrated PRM framework. We believe that these contributions would sustainably benefit the industries with superior supply chain management techniques backed by the strong theoretical foundation.