Cost of Risk Transfer: Pricing Agreements in Residential Supply Chains
Publication: Journal of Architectural Engineering
Volume 10, Issue 3
Abstract
Theoretical and computational studies of supply chains are confined mainly to buyer-supplier dyads. Evaluation of more tiers in the construction sector specifically is also rare, perhaps in part because short-term partnerships are typical. However, supplier selection in residential construction is often conducted in support of multiple subdivision tracts over a comparatively long time-horizon. This paper describes the lumber supply chain for residential construction, extending from the homebuyer to the lumber company. A particular case for a real builder is examined in which a builder adopted a pricing strategy to control their lumber cost risk. The strategy included minimum time periods of fixed pricing, insulating the builder from price fluctuations during those periods. Consideration of supply-chain lead times allows financial risk modeling for the builder-framer/lumber yard–lumber company portion of the supply chain in order to evaluate the cost-effectiveness of this strategy. Historical records of lumber prices were used to conduct Monte Carlo simulations of three tiers of the supply chain. The pricing strategy is shown to result in a risk premium generally in excess of the true commodity price risk.
Get full access to this article
View all available purchase options and get full access to this article.
References
Arizona Partnership for Advancing Technology in Housing (AzPATH). (2001). “Supply chains in residential construction.” AzPATH Research Series Rep. No. 3, 〈http://construction.asu.edu/azpath/Documents/Reports/Report03.pdf〉 (July 16, 2003).
Bashford, H. H., Sawhney, A., Walsh, K. D., and Kot, K.(2003). “Implications of even flow production methodology for U.S. housing industry.” J. Constr. Eng. Manage., 129(3), 330–337.
Bashford, H. H., Walsh, K. D., and Sawhney, A. (2004). “Production system loading-cycle time relationship in residential construction.” J. Constr. Eng. Manage., in press.
Bechtel, C., and Jayaram, J.(1997). “Supply chain management: A strategic perspective.” Int. J. Logist. Manage.,8(1), 15–34.
Choi, T. Y., Dooley, K. J., and Rungtusanatham, M.(2001). “Supply networks and complex adaptive systems: Control versus emergence.” J. Operations Manage., 19(3), 351–366.
Choi, T. Y., Wu, Z., Ellram, L., and Koka, B. R.(2002). “Supplier-supplier relationships and their implications for buyer-supplier relationships.” IEEE Trans. Eng. Manage., 49(2), 119–130.
Corel. (2000). iGrafx Process 2000 user guide, Dallas.
Dainty, R. J., Briscoe, G. H., and Millett, S. J.(2001). “Subcontractor perspectives on supply chain alliances.” Constr. Manage. Econom., 19(8), 841–848.
Damelio, R. (1996). The basics of process mapping, Productivity Press, New York.
Kumaraswamy, M., and Palaneeswaran, E.(2000). “Selection matters—in construction supply chain optimisation.” Int. J. Phys. Distrib. Logist. Manage., 30(7/8), 661–680.
Lamming, R. C., Caldwell, N. D., Harrison, D., and Phillips, W.(2002). “Transparency in supply chain relationships: Concept and practice.” IEEE Eng. Manage. Rev., 30(3), 70–76.
Tommelein, I. D., and Li, A. E. Y. (1999). “Just-in-time concrete delivery: Mapping alternatives for vertical supply chain integration.” Proc., 7th-Annual Conf. of the Int. Group for Lean Construction (IGLC-7), Berkeley, Calif., 97–108.
Tommelein, I. D., Walsh, K. D., and Heshauer, J. C. (2003). “Improving capital projects supply chain performance.” RR 172-11, Construction Industry Institute, Austin, Tex.
Walsh, K. D., Hershauer, J. C., Tommelein, I. D., Walsh, T. A., and Sawhney, A. (2002a). “Lead time reduction via pre-positioning of inventory in an industrial construction supply chain.” Proc., Winter Simulation Conf., IEEE, Piscataway, N.J., 1737–1744.
Walsh, K. D., Bashford, H. H., Pijawka, D. K., Carinci, T., and Upton, M.(2002b). “Drivers for energy efficiency in residential construction.” Cost Eng., 44(4), 22–32.
Williams, T.(1994). “Predicting changes in construction cost indexes using neural networks.” J. Constr. Eng. Manage., 120(2), 306–320.
Information & Authors
Information
Published In
Journal of Architectural Engineering
Volume 10 • Issue 3 • September 2004
Pages: 112 - 118
Copyright
Copyright © 2004 American Society of Civil Engineers.
History
Received: Aug 1, 2003
Accepted: Mar 26, 2004
Published online: Aug 16, 2004
Published in print: Sep 2004
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.