Foundations and Trends® in Technology, Information and Operations Management > Vol 14 > Issue 1–2

Achieving Efficiency in Capacity Procurement

Lusheng Shao, The University of Melbourne, Australia, lusheng.shao@unimelb.edu.au , Edward Anderson, The University of Sydney, Australia, edward.anderson@sydney.edu.au , Bo Chen, The University of Warwick, UK, b.chen@warwick.ac.uk
 
Suggested Citation
Lusheng Shao, Edward Anderson and Bo Chen (2020), "Achieving Efficiency in Capacity Procurement", Foundations and Trends® in Technology, Information and Operations Management: Vol. 14: No. 1–2, pp 138-154. http://dx.doi.org/10.1561/0200000096-8

Publication Date: 01 Oct 2020
© 2020 Lusheng Shao, Edward Anderson and Bo Chen
 
Subjects
Competitive Operations,  Contracting in Supply Chains,  Supply Chain Management
 

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In this article:
1. Motivation and Description of the Problem
2. Modelling Approach and Methodology
3. Main Results and Insights
4. Future Research
References

Abstract

This chapter studies a capacity procurement problem in which a buyer meets an uncertain demand using a combination of spot purchases and supply options that are offered by a number of competing suppliers. The specific setting we consider involves the suppliers each owning a block of capacity and the buyer restricted to reserving the entire block or none. For this setting, we are interested in understanding the buyer’s optimal procurement strategy and the suppliers’ competitive bidding behavior in the supply option market. To this end, we first examine the buyer’s optimal decision given a set of supply options, and then study the suppliers’ optimal bidding strategies in equilibrium. We find that it is optimal for suppliers to set execution price at cost and hence make a profit only through the reservation payment. We also prove that when all the blocks have the same size the buyer’s optimal profit as a function of supplier set is submodular. This property allows us to characterize an equilibrium in which the supply chain optimum is achieved, each supplier makes a profit equal to their marginal contribution to the supply chain and the buyer takes the remaining profit. When the blocks have different sizes, we develop a recursive procedure to characterize a class of equilibria in which the supply chain efficiency is achieved.

DOI:10.1561/0200000096-8
ISBN: 978-1-68083-722-3
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ISBN: 978-1-68083-723-0
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Table of contents:
Advances in Supply Chain Finance and FinTech Innovations Book Overview
Part 1: Financing Issues in Supply Chains
Trade Credit in Supply Chains: Multiple Creditors and Priority Rules
Guarantor Financing Selection Under Influence of Supply Chain Leadership and Economies of Scale
Inventory and Financial Strategies with Capital Constraints and Limited Joint Liability
Part 2: FinTech Innovations for Supply Chains
Financing Inventory Through Initial Coin Offerings (ICOs)
Renewable Identification Numbers: A Supply-Chain Risk View
Part 3: Advances in Risk Management of Operational Systems
Managing Disruption Risk Over the Product Life Cycle
Production Planning with Inventory-Based Financing
Achieving Efficiency in Capacity Procurement
The Term Structure of Optimal Operations
Least Squares Monte Carlo and Approximate Linear Programming with an Energy Real Option Application

Emerging Advances in Supply Chain Finance and FinTech Innovations

Advances in Supply Chain Finance and FinTech Innovations examines three themes:

Financing Issues in Supply Chains look into popular working capital management financing practices: trade credits and guarantor practices including advanced trade credit practices in supply chains, guarantor financing practices for capital constrained retailers, and innovative practices of joint financing of capital constrained firms by a bank.

FinTech Innovations for Supply Chains examines business model innovations for supply chain financing supported through new platform technologies (such as blockchain), and simple financial technologies effectively implemented for high impact in supply chain risk management.

Advances in Risk Management of Operational Systems provide state-of-the art thinking on many risk issues in supply chain operations including disruption strategies over the product life cycle, the production planning complexities for a capital constrained manufacturer that uses Inventory Based Financing (IBF) scheme to fund its working capital needs, capacity procurement decision, capacity planning in the presence of demand and price uncertainty, and valuing complex real options in dynamic operational settings.

 
TOM-096-8

Companion

Foundations and Trends® in Technology, Information and Operations Management, Volume 14, Issue 1-2 Special Issue: Advances in Supply Chain Finance and FinTech Innovations
See the other articles that are also part of this special issue.