Matching demand and supply of short life-cycle products by trading capacity futures

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Matching demand and supply of short life-cycle products by trading capacity futures


Author: Hung, Yick-hin
Title: Matching demand and supply of short life-cycle products by trading capacity futures
Degree: Ph.D.
Year: 2011
Subject: Business logistics -- Management.
Industrial management.
Inventory control.
Hong Kong Polytechnic University -- Dissertations
Department: Dept. of Logistics and Maritime Studies
Pages: xix, 150 leaves : ill. ; 30 cm.
Language: English
InnoPac Record:
Abstract: The mismatching risk of the newsvendor due to demand uncertainty is a fundamental issue in inventory research. Risk pooling is a potent strategy to reduce the underlying demand uncertainty through aggregation. However, past research has been confined to investigating risk pooling among parties within a single supply chain network. We argue that the risk can be pooled and shared among different supply chains, and it can also be transferred to the public via financial derivatives, provided that suppliers have short lead-time capacities that allow retailers to replenish stocks within the season. We treat such reserved capacity (super capacity) as a commodity that can be traded as futures to retailers and speculators. Consider a sub-industry of a certain family of short life-cycle products in which a group of suppliers have comparable production capabilities to produce goods for their "newsvendor-type" of retailers, who sell non-identical products in the market. Under the framework of a two-stage inventory model, the retailers buy physical goods and super capacity futures as inventory portfolios in the first stage. After demand realization in the second stage, the retailers make replenishment decisions, which are limited to the capacity futures on hand. However, the retailers are allowed to form coalitions to transfer the residual capacity futures among themselves. Therefore, the retailers can make bidirectional adjustments to their inventory positions. This mechanism also helps improve supply flexibility and increases the utilization of suppliers' reserved capacity.
The dissertation consists of three parts. First, we examine a case involving only two supply chains that are engaged in a co-opetition game. We compare the two scenarios in which super capacity futures can and cannot be exchanged between the two supply chains in stage two, and prove that Pareto improvement can be obtained. Second, we extend the model to a group of n retailers and m suppliers to form a sub-industry. We employ a biform game to analyze the risks and payoffs to the retailers as players in both the non-cooperative (first) and cooperative (second) stages. Our findings reveal that the retailers can improve their payoffs by sharing risk among different supply chains. Third, we allow the game of trading of super capacity to include speculators from both the sub-industry and the public. We argue that to hedge against risk, the retailers can further share and transfer their risks to the speculators by means of trading super capacity as futures or as options in futures. Our results show that the whole sub-industry is better off with super capacity trading even with the presence of outside speculators. In this thesis we also develop a time-based, value-adding capacity measurement model, which is an output-orientated input measure for super capacity trading among different supply chains involving various products. Our study establishes that trading super capacity futures is an efficient mechanism for individual newsvendors to improve their performance in matching demand with supply by combining operational and financial hedging strategies to reduce and share the mismatching risk that is caused by demand uncertainty within a sub-industry and with the public.

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