Portfolio Contracts In Supply Chain Risk Management: Analysis of Procurement Strategy with System Dynamics Models

Abstract

This paper presents a simulation study on procurement contract management. The purpose of the study is to develop a general framework for supply contracts, which aims to drive costs down and reduce risks of inventory and price flexibility.The first part of the paper emphasizes the important role of procurement strategy in the supply chain management and introduces the main supply contracts. On the basis of the reference modes, the research problems are articulated.Then, system dynamics is used as the main research approach and fulfil three main tasks. Firstly, system dynamics models are developed to link the key variables and present the feedback structure of the supply chain system.The second task is to compare the influences of different contracts on the performance of the buyer and supplier. Last but not least, it shows the dynamics of the system and tests the scenarios, which is critical for the policy design.The innovation of the study is to propose the portfolio contract. The computational simulation results are presented to illustrate the performance of optimal portfolio contracts and their sensitivity to the parameter selection.The study helps to foster in-depth view on highly dynamic and complex problem, and thus contributes to a better understanding of procurement portfolio contracts and supply chain system. This paper indicates that portfolio contracts not only reduce the company's cost, increase the expected profit but also help to control the risks. The work would, hopefully, be a framework for supply contracts that could help the player in the supply chain to optimise their performances like reducing costs and controlling inventory and price risks.