Mix contracts and spot purchases for best deal

27 August 2007
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28 August 2007 | Gareth Mytton

Purchasers can operate a more efficient supply chain if they mix fixed-price contracts with buying on the spot market, according to a model from researchers at Stanford University.

The research, by Haim Mendleson and Tunsay Tunca at Stanford's Graduate School of Business, found that consumers and the supply chain as a whole would benefit from these efficiencies. However, individual suppliers would need to analyse the situation closely to monitor the impact on their profits.

The researchers have developed a spot-market "liquidity" measure that incorporates demand and cost information and can show how efficiently the supply chain will work with spot purchases.

The more liquid the market, they advise, the greater the emphasis manufacturers and suppliers should put on spot purchases.

Markets are liquid - for example, oil supplies - when consumer demands are more predictable, demand forecasts are clearer or there are many potential suppliers.

In an illiquid market, such as high-end computer chips, said Mendleson and Tunca, the emphasis should be on fixed-price contract purchases.

However, purchasers will always need to mix spot deals and long-term contracts, they added.

SMaug2007

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