Dynamic Strategic Procurement from Capacitated Suppliers

Abstract

Many industries are characterized by large buyers and suppliers whose decisions are influenced by the strategic interactions among these parties. Here we present an economic model for a monopolistic buyer that needs to procure a critical item from two candidate suppliers competing to win the buyer’s account. The buyer’s objective is to design a procurement process that minimizes its total cost. We analyze this problem under one static and two dynamic procurement design choices and investigate the impact of these choices and capacities on supplier profits and buyer’s procurement cost. All three processes are modeled as non‐cooperative games and solved under suitable equilibrium concepts. We have found that when the buyer can choose purchase quantities independent of quoted prices, dynamic procurement can lower its cost by as much as 50% when compared to static procurement. However, when the buyer is constrained to set a precommitment quantity and award sales starting with the low priced supplier, the savings obtained from dynamic procurement diminish, but the buyer can still save as much as 12.5%.