Optimal Ordering Decisions in Portfolio Procurement Considering Spot Price Fluctuation

Abstract

This paper studies a newsvendor’s optimal ordering decisions in portfolio procurement from long-term contracts and spot purchases. In portfolio procurement, the newsvendor can order commodities in a long-term contract to meet market demand, and the excess demands can be supplemented from the spot market. Firstly, the newsvendor’s optimal ordering quantity in long-term contracts to maximize the expected profits is achieved when the spot price fluctuation is not considered. Furthermore, the newsvendor’s optimal ordering quantity is derived when the spot price fluctuation is considered. The research will show that the newsvendor’s optimal ordering decisions change with market parameters. Spot price fluctuation has a significant influence on optimal ordering decisions in portfolio procurement. This research uses the method of relative fluctuation of spot price and long-term contract price, which is more applicable in practice. It is shown that the newsvendor’s optimal ordering quantity in a long-term contract increases with the spot price fluctuation, which implies that price fluctuation in the spot market leads to a greater order quantities in long-term contracts. Moreover, it is proven that the newsvendor’s expected profit obtained from portfolio procurement decreases with increasing spot price fluctuation. Finally, this is verified by numerical experiments, and several management insights are suggested.