With the rapid development of electronic commerce, the contract market is not the sole
source to acquire the desired goods. The spot market is gradually treated as another
important alternative source. Traditional commodities such as grains, livestock, oil, copper,
aluminum, chemicals, plastics, etc., are often traded on the spot markets (Seifert et al., 2004;
Xing et al., 2012; Wu et al., 2014). Recently, the spot markets are successfully developed for
many high-tech industries like semiconductors, memory chips, etc. (Fu et al., 2010; Ma et al.,
2013; Luo and Chen, 2017). The advantage of the spot market purchasing is that the
firm can obtain the goods at negligible lead time and avoid exposure to the demand risk
(Lee et al., 2014). Nonetheless, its shortcoming is that the firm has to face the spot price
uncertainty (Shi et al., 2016; Kong et al., 2017). Facing such a big challenge, a combined
usage of these two procurement sources can help the firm avoid over-reliance on the spot
market and obtain a high purchasing flexibility. Under such a situation, an appropriate
contract type should be selected and used as a risk hedging.
In recent years, a spectrum of risk-sharing contracts such as revenue-sharing
contracts, buy back contracts, etc., are designed to help the firm better accommodate the
fluctuating market environment. Among these different contracts, option contracts,
originated in financial derivations, are considered as the most suitable contract format to
be used together with the spot market. With this type of flexible contracts, the firm is
provided with the right to buy or sell a certain amount of goods up to the negotiated
quantity after both stochastic demand and random spot price have been observed.
Obviously, the usage of option contracts is conducive to reaping the advantages of the
alternative sources and balance the two-source procurement risks. Recently, more
companies such as Land Rover, Hewlett-Packard, etc., have started to conduct a
transaction through this portfolio purchasing mechanism (Fu et al., 2012; Fu, 2015).
This portfolio procurement approach, initiated in year 2000, helps Hewlett-Packard save
more than $425 million (Chen and Shen, 2012).
In general, there exist a variety of option contract types. One of the most prevalent types
is unilateral option contracts, which comprise call and put option contracts. The firm, as the
option buyer, pays a unit purchase price upfront for reserving (returning) one unit of good at
a certain future time, and after the two-source uncertainties have been resolved, the firm
could increase buying (cancel ordering) by sending payment (claiming compensation)
to (from) the option writer at a unit pre-negotiated exercise price if necessary. Apparently,
call ( put) option contracts enable the firm to equip with a capacity of adjusting its initial
order only upward (downward). As an extension of unilateral ones, bidirectional option
contracts allow the firm to adjust its initial order in two different directions. So far, whether
concerning a spot market or not, the problem relating to the selection of an appropriate
option contract format in a multi-period setting has remained unaddressed.
This study is very important in that it analyzes a finite-horizon replenishment problem
with various types of option contracts in the context of a spot market. As pointed out in
Section 2, quite a number of papers consider the portfolio replenishment strategy under
the single-period situation. However, some recent literature relating to the multi-period
combined procurement problem mainly focuses on call option contracts that cannot be
deemed as real ones, while ignores other option contract types. To fulfill this gap,
we individually integrate call, put and bidirectional option contracts into the multi-period
replenishment models with a spot market. The following questions will be addressed in
RQ1. With a spot market, what policy does the firm’s replenishment follow, either
without or with option contracts?
RQ2. With a spot market, how to develop an approximate algorithm to evaluate the
policy parameters, either without or with option contracts?
contracts and a