Optimal Procurement Strategies for a Risk-Averse Buyer When Price Is Uncertain

Abstract

A procurement model is built based on the expected utility theory when purchase price is uncertain. The optimal purchasing strategy for a risk-averse manufacturer is obtained. And the influence of different factors on the optimal purchasing strategy is analyzed. The results show that the relationship between the optimal purchasing quantity and the degree of risk aversion depends on the relative level of procurement cost at that time. As the price volatility or drift rate increases, the purchase amount in the early stages will increase, and the purchase amount in the later stages will decrease. Finally, it is demonstrated that the procurement strategy of a risk-neutral manufacturer is a bang-bang strategy, which is different from the procurement strategy of a risk-averse manufacturer.