Ralf W. Seifert

Optimal procurement strategies for online spot markets

Abstract Spot markets have emerged for a broad range of commodities, and companies have started to use them in addition to their traditional, long-term procurement contracts (forward contracts). In comparison to forward contracts, spot markets offer products at essentially negligible lead time, but typically command a higher expected price for this added flexibility while also exhibiting substantial price uncertainty. In our research, we analyze the resulting procurement challenge and quantify the benefits of using spot markets from a supply chain perspective. We develop and solve mathematical models that determine the optimal order quantity to purchase via forward contracts and the optimal quantity to purchase via spot markets. We analyze the most general situation where commodities can be both bought and sold via a spot market and derive closed-form results for this case. We compare the obtained results to the reference scenario of pure contract sourcing and we include results for situations where the use of spot markets is restricted to either buying or selling only. Our approaches can be used by decision makers to determine optimal procurement strategies based on key parameters such as, demand and spot price volatilities, correlation between demand and spot prices, and risk aversion. The results of our analysis demonstrate that significant profit improvements can be achieved if a moderate fraction of the commodity demand is procured via spot markets. The results also show that companies who use spot markets can offer a higher expected service level, but that they might experience a higher variability in profits than companies who do not use spot markets. We illustrate our analytical results with numerical examples throughout the paper.

A review of trade credit literature: Opportunities for research in operations

Trade credit arises when a buyer delays payment for purchased goods or services. Its nature has predominantly been an area of inquiry for researchers from the disciplines of finance, marketing, and economics but it has received relatively little attention in other domains. In our article, we provide an integrative review of the existing literature and discuss conflicting study outcomes. We organize the relevant literature into seven areas of inquiry and analyze four in detail: trade credit motives, order quantity decisions, credit term decisions, and settlement period decisions. Additionally, we derive a detailed agenda for future research in these areas.

Invited ReviewA review of trade credit literature: Opportunities for research in operations

Trade credit arises when a buyer delays payment for purchased goods or services. Its nature has predominantly been an area of inquiry for researchers from the disciplines of finance, marketing, and economics but it has received relatively little attention in other domains. In our article, we provide an integrative review of the existing literature and discuss conflicting study outcomes. We organize the relevant literature into seven areas of inquiry and analyze four in detail: trade credit motives, order quantity decisions, credit term decisions, and settlement period decisions. Additionally, we derive a detailed agenda for future research in these areas.

Applications of RFID in Supply Chains

In this chapter, we first give an introduction to radio-frequency identification (RFID) technology. We discuss capabilities and limitations of this technology in a supply chain setting. We then present several current applications of this technology to supply chains to demonstrate best practices and important implementation considerations. Subsequently, we discuss several issues that may hinder widespread RFID implementation in supply chains. We close by deriving several consequences for successful implementation of RFID, and we give guidance on how a company might best benefit from this technology.

Interrelating Operational and Financial Performance Measurements in Inventory Control

Financial supply chain management and working capital management are increasingly receiving attention as important avenues to increase profitability in supply chains. By actively managing payment terms and working capital requirements, managers can influence financial performance and achieve significant cost savings. However, measures to improve financial performance implicitly restrict and influence operational performance. In our research we elaborate on the benefits of equally considering both operational and financial aspects in decision-making for the physical and financial supply chain. We develop a mathematical model that determines the optimal purchasing order quantity under working capital restrictions and payment delays. We analyze the trade-offs between the most commonly used financial and operational measurements, such as service level, return on investment, profit margin and inventory level. Our results demonstrate the significance of payment delays: Increases/decreases in the upstream/downstream payment delays favor the systems operations by decreasing operational costs. Moreover increases in the working capital employed in the system decrease the total operational cost, increase the total financial cost and lower the return on working capital investment.

Satisfying Customer Preferences via Mass Customization and Mass Production

Two operational formats namely mass customization and mass production can be implemented to satisfy customer preference-based demand. The mass customization system consists of two stages: the initial build-to-stock phase and the final customize-to-order phase. The mass production system has a single stage: building products with pre-determined specifications to stock. In each case, the company makes decisions on the number of initial product variants, product specifications, production quantities and product pricing. Under a uniform customer preference distribution, the optimal number of base-product variants resembles the well known economic order quantity solution, and the optimal product specifications are equally spaced. We characterize three possible benefits of mass customization: (i) the gained surplus from offering each customer her ideal product; (ii) extra revenue from price discrimination; and (iii) reduced costs due to risk pooling under stochastic demand.

Relaxing channel separation: Integrating a virtual store into the supply chain via transshipments

Many established companies have started to use virtual stores as a direct distribution channel in addition to their existing indirect retail channels. These companies must now decide on how to integrate these channels. The alternatives are to operate dedicated distribution channels for the virtual store and the retail stores or to tightly integrate the virtual store into the existing distribution channels. In such an integrated supply chain, retail stores would continue to serve all in-store customers, but excess stock at retail stores could be used to fill some online orders. We analyze this problem from a supply chain perspective by developing and solving mathematical models for both dedicated and integrated supply chains. We characterize the optimal inventory policy and quantify the expected cost savings that can be achieved by using an integrated supply chain over a dedicated supply chain. We show that the cost savings can be significant and that both retailers and customers benefit from an integrated supply chain. We also analyze how the optimal solutions depend on the characteristics of the supply chain and identify conditions under which it would be optimal to operate the virtual store without dedicating any inventory to the virtual store. Throughout the paper, we illustrate our analytical results with numerical examples.

Interrelating operational and financial performance measurements in a multiproduct inventory system

Financial supply chain management and working capital management are increasingly under the spotlight as effective approaches to optimising working capital levels and directing cash flows. Especially in a multiproduct environment, efficient working capital allocation can boost company performance, achieve significant cost savings and demonstrate risk-pooling benefits. In this paper, we focus on the interrelation of working capital and stocking decisions for functional, innovative and heterogeneous product portfolios. We analyse the effect of demand correlation, lead time, payment delays, portfolio sizes, and service level constraints for multiproduct portfolios. Due to the dynamic nature of working capital, we resort to simulation in order to derive managerial insights. Our results attest the importance of payment delays on the profitability of a company. In addition, we demonstrate risk-pooling benefits from a financial perspective.

Inventory leanness and the financial performance of firms

This paper examines the financial consequences that inventory leanness has on firm performance. We conduct an econometric analysis using 4324 publicly traded US manufacturing companies for the period 1980–2008. Using an instrumental variable fixed effects estimator we find a nonlinear relationship between inventory leanness and financial performance. However, we note that the maximum point of this inverted U-shaped relationship often lies at the extreme end of the investigated sample – suggesting a decreasing return from leanness rather than an optimal level. We show that the strength of this relationship is highly dependent on both the industry and inventory component (raw materials, work in process and finished goods) studied. The main novelty and direct implication of our findings is that most firms still have much potential to increase profitability by becoming leaner and they are unlikely to cross a threshold where profitability decreases with increased leanness. We display how much the average firm could gain by becoming leaner and show how this sensitivity changes by inventory component and industry. Finally, we highlight several new econometric aspects that we believe must be addressed when empirically investigating the inventory-performance link.

Evaluation of AGV routeing strategies using hierarchical simulation

To analyse an automated guided vehicle (AGV) system operating under selected vehicle routeing strategies, we present a simulation model that can handle an arbitrary system layout as well as arbitrary numbers of AGVs and pedestrians causing congestion in the system. We introduce a dynamic vehicle routeing strategy based on hierarchical simulation that operates as follows: at the time of each AGV routeing decision in the main simulation, subordinate simulations are performed to evaluate a limited set of alternative routes in succession until the current routeing decision can be finalized and the main simulation resumed. A case study involving a prototype AGV system operating under the control of a global vision system illustrates the advantages not only of this strategy but also of global-vision-based control.