Procurement sharing decision for sustainable and regular products in a multi-tier production system

Many sustainable products require innovative design techniques but the same materials as regular products. In practice, whether pooling the material procurement orders via procurement sharing can be a strategic decision when an OEM produces both sustainable and regular products. In this paper, we formulate a multi-tier production system comprising of an OEM, a CM, and two material suppliers, and study two typical strategies: (1) procurement sharing, where the procurement functions of the sustainable and regular products are outsourced to the CM, and (2) independent procurement, where the OEM independently procures materials for the sustainable product. We solve the four-stage-four-player optimisation problem and find that the change of the market potential of the sustainable product heavily determines the OEM’s overall procurement cost, and consequently the procurement sharing decisions. Under independent procurement, the wholesale prices of the sustainable and regular products show opposite characteristics when the market potential of the sustainable product varies, because the two suppliers have opposite pricing incentives. We derive three interactive effects that alter the OEM’s procurement sharing incentives, which makes the OEM prefer independent procurement only when the market potential of the sustainable product is in a moderate range.