The component procurement problem for the loss-averse manufacturer with spot purchase

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)146-153
Journal / PublicationInternational Journal of Production Economics
Volume132
Issue number1
Publication statusPublished - Jul 2011
Externally publishedYes

Abstract

This paper studies the purchasing behaviour of a loss-averse engineer-to-order manufacturer, who purchases a key component for his final product from a supplier under a single-wholesale-price contract with spot purchase opportunities, where both the product demand and the component spot price are uncertain. Through newsvendor type of models, we analyze several key issues, including the effects of the manufacturer's loss aversion, and the effects of demand and spot price uncertainties on the manufacturer's decision behaviour. We find that the purchasing behaviour of the loss-averse manufacturer differs from those of the risk-neutral and risk-averse ones. Specifically, we identify some sufficient conditions under which the loss-averse manufacturer may purchase a larger order quantity in advance when demand becomes more uncertain or when the price becomes more uncertain. We also discuss the two-wholesale-price contract and show that fixing the emergency supply price may lead to a smaller order quantity. © 2011 Published by Elsevier B.V. All rights reserved.

Research Area(s)

  • Loss aversion, Newsvendor, Prospect theory, Spot purchase