The paper studies the procurement strategies for the A-systems. It concerns a firm producing a product of multiple components. The components’ procurement lead time are different but deterministic. The spot price for the key component fluctuates as a Brownian motion; other components have stable prices. The product demand is random with fixed selling price.
The firm seeks to maximize the expected profit by making proper quantity and procurement timing decisions. Buying earlier, it pays higher cost for holding inventory; delaying procurement, it must pay tardiness penalty for late delivery.
The paper considers two supply contracts. Under the strict contract, the firm must decide the quantity and timing at time 0. It trades off holding cost of early procurement and penalty of delaying. The quantity decision follows the newsvendor logic, while the timing is given by the optimal stopping problem. (In fact, the quantity part can be removed to make the logic cleaner.) Under the flexible contract, the firm can observe the price movement and hence buy at a lower price, thereby lowering the cost. Essentially it is an optimal stopping problem.
Despite the interesting setup, the paper falls short on both methodological and managerial ground. Its analysis hinges on the single random price assumption, which makes the characterization straightforward. The most interesting case is when the prices have the downward trend; but the paper does not make much headway here. That would be fine if the paper makes substantial managerial contribution. But here it fails, too. The two managerial points the paper makes are common sense.
In summary, the paper must go a step deeper.
learn: Luenberger, finish chapter 4;
Review the paper at Pelican, 9-12pm;
TL got the job offer in Socal, 100K, for a week to response;
chat with ZC for 1.5 hr, 5:30pm-7pm;
For Day 92,
GC: pick up the GC medical document, 1h;
GC: fill out all the forms, 3h;
read KK’s empirical work, 1h;