Strategic Sourcing in Procurement

In this paper, we study how a big buyer owing many smallish units may coordinate procurement demands in order to obtain a low price. We show that when the capacity of the big buyer is relatively large, the optimal policy consists on procuring (part of) its requirements through lots. The optimal number and sizes of these lots would depend on the number of potential suppliers as well as the total requirements of this buyer; and in general, a single lot is not optimal. Moreover, we also show that it may be optimal to demand some requirements through smallish units.