Procurement Risk Mitigation for Rebar Using Commodity Futures

This paper presents a model to mitigate the risk of budget overruns during procurement of raw materials. A case example in rebar procurement fora typical metallurgical manufacturing company in China is used. The demand data was supplied by the company and the rebar price data was obtained from Shanghai Futures Exchanges. The novelty of this study lies in the incorporation of budgetary control into the objective function of the model. A multistage rebalancing strategy of the futures position is used to reduce the impact of unexpected changes in rebar supply price and finished product demand. The complex objective function is approximated by a quadratic expression, and suboptimal solutions are obtained for cases where raw the material price is independent of the customer demand. When compared with the company’s spot buying approach without hedging, the results from the model show the proposed multistage futures balancing model can help reduce the budget overspending by as much as 32%. Further experiments are carried out to study the effects of changing price and demand volatilities, and the results confirm the usefulness of model in mitigating the underlying risk.