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Dynamic Strategic Procurement from Capacitated Suppliers

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  • Abdullah Dasci
  • Kemal Guler

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%.

Suggested Citation

  • Abdullah Dasci & Kemal Guler, 2019. "Dynamic Strategic Procurement from Capacitated Suppliers," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 990-1009, April.
    • Handle: RePEc:bla:popmgt:v:28:y:2019:i:4:p:990-1009
    DOI: 10.1111/poms.12967
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    Cited by:

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    2. Mohsen Ahmadian & Ehsan Elahi & Roger Blake, 2022. "The Behavioral Effects of Competition Intensity and Cost Structure on Competing Suppliers: An Experimental Study in the Context of the USA," International Journal of Global Business and Competitiveness, Springer, vol. 17(2), pages 117-129, December.
    3. Dong, Binwei & Tang, Wansheng & Zhou, Chi & Ren, Yufei, 2021. "Should original equipment manufacturer assist noncompetitive contract manufacturer to expand capacity?," Omega, Elsevier, vol. 103(C).
    4. Svoboda, Josef & Minner, Stefan & Yao, Man, 2021. "Typology and literature review on multiple supplier inventory control models," European Journal of Operational Research, Elsevier, vol. 293(1), pages 1-23.
    5. Jianghua Wu & Zepeng Wang & Chenchen Zhao, 2023. "Effects of production capacity and substitutability on optimal pricing and inventory policies," Annals of Operations Research, Springer, vol. 326(1), pages 341-367, July.

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