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.
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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
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