Portfolio Procurement in Supply Chain Management

In the literature of supply chain management (SCM), the traditional approach to balance supply and demand is to design bilateral supply contracts in order to provide mutual benefits to both sellers and buyers. The commonly used contract parameters include decision rights, pricing, minimum purchase commitments, quantity flexibility, buyback or returns policies, allocation rules, lead time, and quality (Tsay et al., 1999; Cachon, 2003). In business reality, however, a procurement manager may have more flexibility to receive necessary products from additional supply sources, such as spot market and option contracts. As effective complements to the bilateral supply contracts, the spot market and the option contracts are closely related to each other. This chapter is particularly interested in optimal portfolio procurement policy under different market conditions, in which the procurement manager needs to determine the optimal quantity of physical products and option contracts to purchase.