Raw material procurement with fluctuating prices using speculative inventory under consideration of different contract types and transport modes

Abstract

The paper develops a combined dynamic procurement and transport model for performance evaluation by explicitly considering fluctuating prices of raw material, alternative transport modes as well as contract types. In a dynamic environment the procurement managers face (i) the challenge to select the ‘right’ strategy (i.e. transport mode and contract type) and (ii) in each period the decision whether to procure or not, depending on the price; in case of procurement, the price-dependent quantity must be determined. For tackling the decision problems of procurement, contract price and transport mode, we propose an approach motivated by demand models depending on the reservation price which is derived from revenue management. Alternative strategies are characterised by the contract type (short-term, long-term and portfolio), by the possibility to hold speculative inventories or not, and by the modes of transport including intermodal and multi-mode transport. Based on the procurement, transport and inventory costs, the performance of selected strategies is illustrated for a real supply process in the chemical industry using dynamic process analysis. The findings show that the most efficient strategies lead to reduction of average total procurement costs between 8 and 18%. Subsequently, managerial guidelines are derived for the selection of the most appropriate strategy.