Risk averse supply portfolio selection with supply, demand and spot market volatility

Yasemin Merzifonluoglu*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Enterprise Risk Management (ERM) has become one of the most essential subjects in business management. This paper establishes how risk modeling can be applied to supply chain management, specifically to supply portfolio procurement decisions of a firm. In a single period setting, parts can be procured via traditional forward contracts, option contracts or spot purchases. Customer demand and spot prices are random and possibly correlated and firm's primary suppliers are subject to complete disruptions and yield uncertainties. This paper analyzes several scenarios where the spot market is not available, available for buying only, and available for both buying and selling. This article develops and solves mathematical models considering the risk neutral and risk averse (CVaR) objectives independently or simultaneously. For the special case of normally distributed random variables and a risk neutral objective, optimality properties were developed. A broad numerical study examines the sensitivity of procurement strategies to key problem parameters such as, risk attitude, demand and spot price volatilities, correlation between demand and spot prices and terms of option contracts. (C) 2015 Elsevier Ltd. All rights reserved.

Original languageEnglish
Pages (from-to)40-53
JournalOmega: The international journal of management science
Volume57
Issue numberPart A
DOIs
Publication statusPublished - Dec 2015
Externally publishedYes

Keywords

  • Supply chain management
  • Procurement management
  • Spot markets
  • Supply disruptions
  • Conditional value-at-risk

Cite this

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title = "Risk averse supply portfolio selection with supply, demand and spot market volatility",
abstract = "Enterprise Risk Management (ERM) has become one of the most essential subjects in business management. This paper establishes how risk modeling can be applied to supply chain management, specifically to supply portfolio procurement decisions of a firm. In a single period setting, parts can be procured via traditional forward contracts, option contracts or spot purchases. Customer demand and spot prices are random and possibly correlated and firm's primary suppliers are subject to complete disruptions and yield uncertainties. This paper analyzes several scenarios where the spot market is not available, available for buying only, and available for both buying and selling. This article develops and solves mathematical models considering the risk neutral and risk averse (CVaR) objectives independently or simultaneously. For the special case of normally distributed random variables and a risk neutral objective, optimality properties were developed. A broad numerical study examines the sensitivity of procurement strategies to key problem parameters such as, risk attitude, demand and spot price volatilities, correlation between demand and spot prices and terms of option contracts. (C) 2015 Elsevier Ltd. All rights reserved.",
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Risk averse supply portfolio selection with supply, demand and spot market volatility. / Merzifonluoglu, Yasemin.

In: Omega: The international journal of management science, Vol. 57, No. Part A, 12.2015, p. 40-53.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

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AU - Merzifonluoglu, Yasemin

PY - 2015/12

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AB - Enterprise Risk Management (ERM) has become one of the most essential subjects in business management. This paper establishes how risk modeling can be applied to supply chain management, specifically to supply portfolio procurement decisions of a firm. In a single period setting, parts can be procured via traditional forward contracts, option contracts or spot purchases. Customer demand and spot prices are random and possibly correlated and firm's primary suppliers are subject to complete disruptions and yield uncertainties. This paper analyzes several scenarios where the spot market is not available, available for buying only, and available for both buying and selling. This article develops and solves mathematical models considering the risk neutral and risk averse (CVaR) objectives independently or simultaneously. For the special case of normally distributed random variables and a risk neutral objective, optimality properties were developed. A broad numerical study examines the sensitivity of procurement strategies to key problem parameters such as, risk attitude, demand and spot price volatilities, correlation between demand and spot prices and terms of option contracts. (C) 2015 Elsevier Ltd. All rights reserved.

KW - Supply chain management

KW - Procurement management

KW - Spot markets

KW - Supply disruptions

KW - Conditional value-at-risk

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