Decentralized Procurement of Durable Goods with Strategic Inventories

Industry practitioners and academic researches typically view decentralized procurement as an underperforming choice. In this paper, we counter-intuitively demonstrate that decentralization can actually benefit a firm when it with multiple divisions procures durable goods from a supplier in terms of its strategic use of inventories. We study a two-period model and identify the equilibrium results on the supplier's wholesale prices, the firm's order quantities and inventory levels, and profits under centralized and decentralized procurements. The analytic results show that the firm's profit can be improved through each division's decision on the durable good procurement. In particular, decentralized procurement can provide a moderate inventory levels and thus alleviate the time-inconsistent issues of durable good procurement. Moreover, we show that the profit improvement always increase in durability and the number of divisions.