Valuing Supply Contracts under Uncertainty(Theory and Methodology)

概要

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Supply chain contracts involve determining values for both producer and supplier sides. Either party often tends to optimize its own benefits under competitive circumstances. In the process of production, it usually involves the procurement of materials from suppliers who are located in different countries. Thus, not only the uncertainty factor in demand, but also the uncertainty in exchange rates affect the value of the contract. A flexible supply contract is preferred by the producer, regardless of the inflexible production on the supplier side. In this research, we analyze the value of procurement contracts with regard to uncertainty in demand and prices that are associated with the foreign exchange rate. The mean reversion process is assumed to replicate the dynamics of the exchange rate and is usually analyzed using a multinomial approach. This method, combined with traditional dynamic programming, makes the problem computationally infeasible even for a small number of variables and a small number of states. We propose to solve the problem using the approximation dynamic programming method. This method is effective for handling stochastic dynamic programming problems that have a large number of states. We show that the problem converges and the optimal order quantity under uncertainty can be obtained, thereby increasing the value of the contract.
2011-08-15