A purchaser's optimal procurement strategy under emergencies

Abstract

This paper investigates a purchaser's optimal procurement strategy under emergencies. The occurrence of emergencies often leads to sharp fluctuations in prices and weakens supply stability, which increases procurement risks for purchasers. In this study, we use the option contract to actively respond to market fluctuations and reduce procurement risks caused by emergencies. If there is insufficient inventory due to occurrence of emergencies, part or all of the shortages can be met by an emergency replenishment. Then, we conduct an in-depth research on the optimal option procurement strategy for purchasers under emergencies. The results show that, a higher emergency replenishment rate leads to a smaller option purchase quantity if the shortage cost is not considered, since the emergency replenishment can save part or all of the shortages. If the shortage cost is considered, both over-purchasing and under-purchasing of options lead to corresponding losses, and then the trend in a purchaser's optimal option purchasing decision is decided by the dominance of the two types of losses. Finally, we summarize the results of the study to give managerial insights into the optimal option purchasing strategies for purchasers under emergencies.