Delegation versus control under competition and bargaining power distribution in supply chain procurement

This paper studies the optimal strategies of procuring components in a three-tier supply chain setting, including two competing original equipment manufacturers (OEM), a contract manufacturer (CM) and a supply market. The OEMs sell substitutable products in the same market. The OEMs are dependent on the CM to perform significant manufacturing tasks or customized processing services. The CM also needs a key component for performing its task; this key component should be procured from an upstream supplier. To procure the key component, each OEM has two options; it can either procure directly through the supply market or delegate procurement process to the CM. The OEMs procurement game has been analyzed under a nonstrategic supplier case where a quantity discount schedule is exogenously given. The optimal component procurement strategy has been characterized at different levels of quantity discount rates offered by the upstream supplier.