Simulation of the residential lumber supply chain

We describe the lumber supply chain for a case study of a large home builder, extending through multiple tiers from the homebuyer to the lumber company. The builder required its framing subcontractor to accept the risk for lumber cost fluctuations. Under this agreement, the framing subcontractor provided a fixed lumber cost, which could only periodically adjusted. The lumber supply chain leading to the framing subcontractor was found to be of long and variable duration. The function of the builder-framer/lumber yard-lumber company portion of the supply chain was simulated in order to evaluate the cost effectiveness of this strategy, using historical records of lumber prices to model commodity price fluctuations. Based on the simulation results, the risk transfer strategy appears to induce a risk premium generally in excess of the true commodity price risk.