Optimal Purchasing Decisions with Supplier Default in Portfolio Procurement

ABSTRACT

As global public health events and regional conflicts have greater influence on supply chains nowadays, supplier default in procurement becomes more and more common in practice. However, there is less research on portfolio procurement purchasing decisions in the case of fixed-term contract supplier default. This paper focuses on the optimal purchasing decision of buyers by using a combination of fixed-term contracts and spot transactions, which is a beneficial extension of the classical newsvendor model. When supplier default is not considered, the optimal purchase quantity in the fixed-term contract is first obtained, which maximizes the buyer’s expected profits. Research shows that supplier default has an important impact on the optimal purchasing decision making in portfolio procurement. The optimal purchase quantity of the buyer in the fixed-term contract decreases with the increase in the default rate of the contract supplier, which implies that the default from the contract supplier inhibits a larger purchase quantity in the fixed-term contract. In addition, it is proved that the buyer’s expected profits from portfolio procurement increases with the decrease in the contract supplier’s default rate. Finally, numerical experiments and sensitivity analysis are conducted to prove the result, and some management opinions on the optimal decision-making in portfolio procurement with fixed-term contracts and spot transactions are put forward.