A dynamic Stackelberg game model for portfolio procurement

Abstract

Purpose – The purpose of this paper is to propose a portfolio procurement framework to response to uncertain customer demand and purchasing price volatility in a simultaneous manner. Then it aims to obtain optimal procurement and production decisions under the portfolio framework to maximize profit. Design/methodology/approach – The portfolio procurement problem is modeled as a dynamic Stackelberg game and Nash equilibrium solutions are obtained. The portfolio procurement framework is analyzed in the settings, with both risk-neutral objective and downside risk constraints measure of contract prices. Findings – By obtaining the Nash equilibrium solutions for both the buyer’s ordering decisions and the supplier’s optimum production decisions, Stackelberg game model for portfolio procurement is proved to be feasible. Additionally, downside risk constrains are proposed to help supply chain participants’ to evaluate the profitability and risk probabilities of the designed procurement contracts under the uncertain customer demand and spot market. Research limitations/implications – This paper assumes the supplier is risk averse and the buyer is risk neutral, and it would be interesting to examine the performances of portfolio procurement strategy with different risk attitudes participants. Practical implications – This research could help the buyer respond to not only demand uncertainty but also the volatile spot price in the procurement process. Related optimal portfolio procurement strategy can be carried out to improve the enterprise’ procurement plan by adjusting the order of long-term contract, option contract and the spot market. The proposed framework could also help suppliers design and evaluate contracts for buyers with different risk preference, and on the other hand help the buyers decide if she should accept the contracts from the supplier. Social implications – This research should also increase awareness in both academia and industry on the opportunities of using the dynamic portfolio procurement approach to enhance flexibility and to mitigate the inventory as well as price risks in the procurement process. Effective downside risk constrains on contract prices could also help to protect the bottom line of companies with different risk preference. Originality/value – The portfolio procurement framework proposed in this research can mitigate inventory and price risks simultaneously. Also, instead of solving the portfolio procurement planning problem in computational simulation experiments as in previous research, this paper proposed a dynamic game model for this portfolio-based procurement problem and obtained its Nash equilibrium solutions for both the buyer’s ordering decisions and the supplier’s optimum production decisions. Finally, an innovative and simple downside risk constraints has been designed to help the buyer evaluate supplier’s contract prices according to their individual risk preference.