Supplier-led outsourcing: an intertemporal hierarchical framework

Building up a supply capacity to meet future and uncertain demands for products is a strategic issue which is both costly and dealt with in numerous approaches. For example, oil and gas contracts as well as production of fashion goods or production for peak demands (as they recur at Christmas time) involve decisions distributed in time with the sole purpose to meet a demand that may outstrip the capacity when the selling season comes. This paper considers the problem of the firm with a capacity to build up various production operations and inventory combined with the use of multiple suppliers that may complement its supply needs. This problem is treated under different types of contracts in both a single-period and a multi-period context in a supplier-led, firm-follower environment, thereby leading to a hierarchical supply game. A solution of the games formulated is then used to derive some strategic insights regarding the process of inventory (and capacity) build up to meet specific time and peak demands.