Influence On Procurement & Inventory Decision For Steel Firm By Supply Disruption And Contract Default

The steel industry is the foundation of the national economy, and its development influences economy of China and the whole world. As raw material of steel, steady supply of iron ore is related to the development of the whole industry. At present, iron ore imports accounts for more than 50 percent of the global trade. However, Chinese steel enterprises are in a passive position in the iron ore pricing, because of international trade oligopoly. At the same time, Chinese steel enterprises will face the risk of supply disruption which makes the cost of procurement and inventory increase. In the short term, we can’t change the situation of upstream oligopoly, but steel firm should focus on how to reduce the cost of procurement and inventory to keep competitiveness.We get knowledge of international trade and iron ore spot market through reading literature of iron ore trade and supply chain related and collecting relevant industry information. We then analyze the key link of the supply chain, including international and domestic suppliers, steel enterprises and demand market. At the same time, we compare contract and spot market and supply disruption. Iron ore procurement and inventory is an important strategy for steel enterprises to guarantee production and control cost. We build costs and benefits model to study procurement and inventory strategy of steel enterprises, and supply disruption risk and contract default included.We analyze procurement and inventory in the condition of supply disruption, and introduce several kinds of supply disruptions and their influences on steel enterprises. Then we use procurement and inventory cost as the objective function to build model and give solutions. At the same time, we do numerical analysis and find that as long as the contract price is lower than the spot price, the steel enterprise can accept a certain degree of supply disruption risk and choose contract suppliers. On the contrary, suppliers will raise price closer to the spot price.In the present iron ore market, spot price’s fluctuation make steel enterprise and iron ore suppliers have a choice of breach of contract. Both sides may find a balance between costs and benefits to maximize their own profit. So, we build models of expected earnings in the position of iron ore suppliers and steel firms under the condition of breach of contract, and find out the terms of default compensation ratio and the contract price that both sides are willing to accept. We find that mineral producers have the conflicts between high profit of supplying at high price and net benefit of default, while steel companies have the conflicts between cost advantages of purchasing at low price and net benefit of default. The contract term with higher contract price than spot price can be accepted by both sides, and the compensation percentage should be within ten percent. From the side of protecting steel company, it’s better to raise compensation percentage which leads to lower contract price than spot price.