Should an OEM Retain Component Procurement when the CM Produces Competing Products?

We consider a large original equipment manufacturer (OEM) who relies on a contract manufacturer (CM) to produce her product. In addition to the OEM's product, the CM also produces for a smaller OEM. Both the larger OEM and the CM can purchase the component from the supplier, but their purchase prices may differ and remain unknown to each other. The main question we address is whether the larger OEM should retain component procurement by purchasing components from the supplier and reselling to the CM (buy–sell), or outsource component procurement by letting the CM purchase directly from the supplier (turnkey). We show that, under buy–sell, the larger OEM's optimal strategy is to resell components at the highest possible component purchase price of the CM (i.e., the street price). By comparing buy–sell and turnkey, we find that a CM with low component price is better off under turnkey, even though under buy–sell he receives more profits through the products sold to the smaller OEM. Furthermore, the larger OEM's preference between buy–sell and turnkey depends on her component price, the volatility of the CM's component price and substitutability between the two products.     

Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition

This study develops an analytical model to evaluate competing retail firms' sourcing strategies in the presence of supply uncertainty. We consider a common supplier that sells its uncertain supply to two downstream retail firms engaging in price competition in a horizontally differentiated product market. The focal firm has a dual‐sourcing option, while the rival firm can only source from the common supplier. We assess the system‐wide effects of supply uncertainty on the focal firm's incentive to pursue the dual‐sourcing strategy. We find that the focal firm's dual‐sourcing strategy can create a win–win situation that leads to increased retail prices and expected profits for both firms. Furthermore, under certain conditions, we show that it is beneficial for the focal firm to strategically source from the common supplier, even if its alternative supplier offers a lower wholesale price. Overall, we identify two types of incentives for adopting the dual‐sourcing strategy: the incentive of mitigating supply risk through supplier diversification and the incentive of strategic sourcing for more effective retail competition.     

Supply Management Under High Goal Incongruence: An Empirical Examination of Disintermediation in the Aerospace Supply Chain

Aftermarket sales and profits are becoming an increasingly important part of an original equipment manufacturer's (OEM) business model. Because replacement parts often do not require further manufacturing, OEMs act as intermediaries in the aftermarket. As with any intermediary, the OEM must concern itself with suppliers disintermediating its supply chain selling replacement parts directly to the OEM's customers. We frame supply chain disintermediation (SCD) as a principal–agent contracting problem between an OEM buyer and a supplier. Hypotheses relate contract conditions, goal incongruence, supplier capabilities and contract enforcement to SCD. The data are collected from the aerospace industry using a multimethod study, combining an Internet‐based survey with archival data. Causal modeling with structural equation modeling (SEM) shows general support for the hypotheses. Particularly, SCD is positively related to buyer–supplier goal incongruence. The agency model offers insights that differ from previous transaction‐cost‐based models of buyer–supplier relationships. OEM buyers with a lucrative aftermarket should consider aligning goals through incentives rather than relying entirely on economic hostages associated with specific assets.     

Delegation vs. Control in Supply Chain Procurement under Competition

This paper studies the optimal component procurement strategies of two competing OEMs selling substitutable products. The OEMs outsource their production to a common contract manufacturer, who in turn needs an input from a component supplier. Each OEM may either directly procure the input from the component supplier, or delegate the procurement task to the contract manufacturer. We first analyze the OEMs' procurement game under a non‐strategic supplier whose component price is exogenously given. It is found that symmetric equilibria arise for most situations, that is, both OEMs either control or delegate their component procurement in equilibrium. Interestingly, despite the commonly‐held belief that the contract manufacturer would be worse off as OEMs gain component procurement control, we show that the contract manufacturer may enjoy a higher profit. Then we study the OEMs' procurement game under a strategic supplier who can set its component price. We find that the supplier's strategic pricing behavior plays a critical role in the equilibrium procurement structure. In particular, in the equilibrium under strategic supplier, the larger OEM always uses delegation while the smaller OEM may use either delegation or control. By identifying the driving forces behind the OEMs' procurement choices, this research helps explain observed industry practices and offer useful guidelines for firms' component sourcing decisions.     

Contracting for Capacity under Renegotiation: Partner Preferences and the Value of Anticipating Renegotiation

This paper studies contract renegotiation in a stylized supply chain model. Two original equipment manufacturers (OEMs) sign fixed‐quantity contracts with a contract manufacturer (CM) prior to demand realization. Contract renegotiation after demand realization allows the OEMs to use capacity that is more or less than what they contracted for. We assume that the extra profit due to efficient allocation of capacity is allocated to the supply chain parties according to the egalitarian rule and investigate when an OEM's expected post‐renegotiation profit is maximized. We aim to understand how an OEM's expected post‐renegotiation profit is affected by her ability to negotiate a low wholesale price in the initial contract as well as the ability of the other OEM to do the same. Regardless of whether renegotiation is anticipated or not at the time of the initial contract, we find that an OEM, who had weak buyer power vis‐a‐vis the CM and was unable to negotiate a low wholesale price in the initial contract, may benefit more from renegotiation than a stronger OEM. In addition, we show that how the expected post‐renegotiation profit of an OEM changes with demand variance or anticipating renegotiation depends on the strength of the OEM's buyer power. Finally, we numerically test the robustness of our results in a supply chain with three OEMs and also identify when the OEMs prefer to leave the CM out of the renegotiation.     

Product Line Extensions and Technology Licensing with a Strategic Supplier

In many industries, original equipment manufacturers (OEMs) must obtain critical components from a few powerful suppliers. To the extent that the OEMs are also concentrated, the interactions between the suppliers of critical components and the OEMs are strategic, and have implications for how an incumbent OEM chooses its product line and interacts with potential rivals. We demonstrate that, by adding a low‐end product line extension, an OEM can induce a strategic supplier to offer more favorable pricing. Moreover, depending upon the cost structure and relative performance of the product line extension, the OEM may benefit even more from the low‐end line extension if it is produced by a rival instead of by itself, even if it cannot obtain any licensing income from it. Among other things, we show that this can result in a decentralized OEM accommodating competition from rivals producing product line extensions that would not be developed in a vertically integrated supply chain. In an extension, we re‐examine the common assumption that the supplier unilaterally dictates a single wholesale price that is available to all downstream buyers. We demonstrate that, by committing to offer a “lowest available” wholesale price to all downstream buyers, a supplier can encourage an incumbent OEM to share its technology (or otherwise accommodate the entry of a rival) so that the supplier, the incumbent OEM, and the rival are all better off.     

竞合供应链的采购与质量决策研究

研究由原始设备制造商、竞争供应商与非竞争供应商构成的竞合供应链中原始设备制造商的采购决策,并分析了品牌效应、竞争供应商的模仿能力、非竞争供应商的原材料供应能力对采购模式选择与质量决策的影响。结果表明,双源采购对原始设备制造商而言是最优的采购策略;竞争供应商模仿能力较小时,原始设备制造商决策的产品质量随竞争供应商模仿能力的增大而提高,而当竞争供应商的模仿能力较大时,其模仿能力的增强会导致原始设备制造商降低产品的质量;原始设备制造商的品牌效应可以降低竞争供应商的竞争程度;非竞争供应商提高原材料供应能力并不一定能为自己带来更高的利润。本文考虑品牌效应和竞争供应商模仿能力等对原始设备制造商质量和采购决策的影响,扩展了现有的研究。     

Outsourcing to a Powerful Contract Manufacturer: The Effect of Learning‐by‐Doing

The contract manufacturing industry has grown rapidly in recent years as firms have increasingly outsourced production to reduce costs. This growth has created powerful contract manufacturers (CMs) in several industries. Achieving a competitive cost position is often a primary motive for outsourcing. Outsourcing influences both the original equipment manufacturer's (OEM) and the CM's production levels, and, therefore, through learning‐by‐doing renders future costs dependent on past outsourcing decisions. As such, outsourcing should not be viewed as a static decision that, once made, is not revisited. We address these considerations by analyzing a two‐period game between an OEM and a powerful CM wherein both firms can reduce their production costs through learning‐by‐doing. We find that partial outsourcing, wherein the OEM simultaneously outsources and produces in‐house, can be an optimal strategy. Also, we find that the OEM's outsourcing strategy may be dynamic—i.e., change from period to period. In addition, we find both that the OEM may engage in production for leverage (i.e., produce internally when at a cost disadvantage) and that the CM may engage in low balling. These and other findings in this paper demonstrate the importance of considering learning, the power of the CM, and future periods when making outsourcing decisions.     

OEM product design in a price competition with remanufactured product

An original equipment manufacturer (OEM) produces new products and often faces a dilemma when determining the level of interchangeability in its product design. The interchangeability is considered as a degree to which the product can be disassembled without force, and thus an increasing degree of interchangeability would decrease the OEM's production cost, but it would also lower a remanufacturer's cost in cannibalizing used items. Decreasing the level of interchangeability to deter the remanufacturer, on the other hand, would simultaneously increase the production costs of the OEM. We thus formulate a two-period supply chain model consisting of two chain members, an OEM and a remanufacturer, to investigate the product design decision of the OEM and both chain members' competitive pricing strategies. We then characterize the equilibrium decisions and profits with regard to costs and consumers' preference for the remanufactured product. We also evaluate a strategic game in which the OEM chooses the degree of interchangeability, and the remanufacturer determines its collection strategy. We find that the product-design strategy is effective for the OEM in competing with the remanufacturer, but it is not necessarily harmful to the remanufacturer.     

Supplier Selection Behavior Under Uncertainty: Contextual and Cognitive Effects on Risk Perception and Choice

Buyers often make supplier selection decisions under conditions of uncertainty. Although the analytical aspects of supplier selection are well developed, the psychological aspects are less so. This article uses supply chain management and behavioral decision theories to propose that attributes of the purchasing situation (category difficulty, category importance, and contingent pay) affect cognition that, in turn, affects a supply manager's choice. We conducted a supplier selection behavioral experiment with practicing managers to test the model's hypotheses. When the context involves an important or difficult sourcing category, higher risk perceptions exist that increase preference for a supplier with more certain outcomes, even when that choice has a lower expected payoff. However, the presence of contingent pay decreases risk perceptions through higher perceived supplier control. We also find that a manager's risk propensity increases preferences for a supplier with less certain outcomes regardless of perceived risk. Our model and results provide a theoretical framework for further study into the cognitive aspects of supplier selection behavior and provide insight into biases that influence practicing supply chain managers.     

Role of Random Capacity Risk and the Retailer in Decentralized Supply Chains with Competing Suppliers

This research considers a supply chain under the following conditions: (i) two heterogeneous suppliers are in competition, (ii) supply capacity is random and pricing is endogenous, (iii) consumer demand, with and without an intermediate retailer, is price dependent. Specifically, we examine how uncertainty in supply capacity affects optimal ordering and pricing decisions, supplier and retailer profits, and the incentives to reduce such uncertainty. When two suppliers sell through a monopolistic retailer, supply uncertainty not only affects the retailer's diversification strategy for replenishment, but also changes the suppliers’ wholesale price competition and the incentive for reducing capacity uncertainty. In this dual‐sourcing model, we show that the benefit of reducing capacity uncertainty depends on the cost heterogeneity between the suppliers. In addition, we show that a supplier does not necessarily benefit from capacity variability reduction. We contrast this incentive misalignment with findings from the single‐supplier case and a supplier‐duopoly case where both suppliers sell directly to market without the monopolistic retailer. In the latter single‐supplier and duopoly cases, we prove that the unreliable supplier always benefits from reducing capacity variability. These results highlight the role of the retailer's diversification strategy in distorting a supplier's incentive for reducing capacity uncertainty under supplier price competition.     

Sourcing Decisions with Stochastic Supplier Reliability and Stochastic Demand

Supplier sourcing strategies are a crucial factor driving supply chain success. In this paper, we investigate the implications of uncertain supplier reliability on a firm's sourcing decisions in an environment with stochastic demand. In particular, we characterize specific conditions under which a firm should choose a single versus multiple supplier sourcing strategy. In an environment with both uncertain demand and supply, we characterize the total order quantity, the number of suppliers selected for order placement, and the allocation of the total order quantity among these selected suppliers. For deeper managerial insight, we also examine the sensitivity of the optimal sourcing decisions to interactions between uncertainties in product demand and supply reliability. We show that sourcing from a single supplier is an optimal strategy for environments characterized by high levels of demand uncertainty or high salvage values. A numerical analysis based on data obtained from an office products retailer further reinforces our analytical results. In addition, we also find that when minimal order quantities are imposed, there are situations where it is not optimal to place an order with the lowest cost supplier.     

Competitive Quality Choice and Remanufacturing

We consider an original equipment manufacturer (OEM) who faces competition from an independent remanufacturer (IR). The OEM decides the quality of the new product, which also determines the quality of the competing remanufactured product. The OEM and the IR then competitively determine their production quantities. We explicitly characterize how the OEM competes with the IR in equilibrium. Specifically, we show that the OEM relies more on quality as a strategic lever when it has a stronger competitive position (determined by the relative cost and value of new and remanufactured products), and in contrast it relies more heavily on limiting quantity of cores when it has a weaker competitive position. The IR's entry threat as well as its successful entry can decrease the consumer surplus. Furthermore, our results illustrate that ignoring the competition or the OEM's quality choice leads to overestimating benefits of remanufacturing for consumer and social welfare. In addition, we show an IR with either a sufficiently weak competitive position (so the OEM deters entry) or a sufficiently strong one (so the OEM is forced to limit quantity of cores) is desirable for reducing the environmental impact. Comparing our results with the benchmark in which the OEM remanufactures suggests that encouraging IRs to remanufacture in lieu of the OEMs may not benefit the environment. Furthermore, the benchmark illustrates that making remanufacturing more attractive improves the environmental impact when the remanufacturer is the OEM, while worsening it when remanufacturing is done by the IR.     

Forecast Updating and Supplier Coordination for Complementary Component Purchases

We study a supply chain where an original equipment manufacturer (OEM) buys subassemblies, comprised of two complementary sets of components, from a contract manufacturer (CM). The OEM provides a demand forecast at the time when the CM must order the long lead‐time set of components, but must decide whether or not to provide updated forecasts as a matter of practice. Forecast updates affect the CM's short lead‐time purchase decision, and the anticipation of updates may also affect the long lead‐time purchase decision. While the OEM and CM both incur lost sales costs, the OEM can decide whether or not to share the overage costs otherwise fully borne by the CM. We investigate when the OEM is better served by committing to provide updated forecasts and/or committing to share overage costs. For a distribution‐free, two‐stage forecast‐update model, we show that (1) the practice of providing forecast updates may be harmful to the OEM and (2) at the OEM's optimal levels of overage risk sharing, the CM undersupplies relative to the supply chain optimal quantity. For a specific forecast‐update model, we computationally investigate conditions under which forecast updating and risk sharing are in the best interest of the OEM.     

Mitigating Supply Uncertainty: The Interplay Between Diversification and Pricing

We consider a firm's sourcing problem from one reliable supplier and one unreliable supplier in two price‐setting scenarios. In the committed pricing scenario, the firm makes the pricing decision before the supply uncertainty is resolved. In the responsive pricing scenario, the firm's pricing decision is made after the supply uncertainty is resolved. For the committed pricing scenario, we develop a condition on supply uncertainty that guarantees the unimodality of the firm's objective function. By comparing the firm's optimal diversification decisions in the two pricing scenarios, we examine the interplay of supply diversification strategy and responsive pricing strategy in mitigating supply uncertainty. While both strategies are effective in mitigating supply uncertainty, we show that they are not necessarily substitutes. The relationship between these two strategies depends on two adverse effects caused by supply uncertainty: the lost‐revenue effect and the lost‐goodwill effect. More specifically, when the lost‐revenue effect dominates the lost‐goodwill effect, these two strategies are complements; otherwise, they are substitutes. Furthermore, we examine the impact of market size, price sensitivity, supplier reliability, and failure rebate on the interplay between these two strategies, and discuss the implications of our results. Finally, we extend our analysis to the case of two unreliable suppliers and show that the insights regarding the interplay between diversification and pricing continue to hold.     

Managing Engineering Design for Competitive Sourcing in Closed‐Loop Supply Chains

We examine the strategic interplay between a buyer's design decision and the ensuing competition between suppliers in a three‐tier closed‐loop supply chain setting with significant recycling considerations. The nature of the engineering design decision in our research entails choice of integral versus modular design that has direct implications for the input raw material waste and ensuing competition between suppliers (i.e., incumbent and new). Whereas the integral design requires a large blank and generates excessive material scrap, the modular design reduces the generated scrap, and enhances cut‐to‐fit modularity, but incurs joining cost and yield loss. The incumbent supplier who supports the status quo choice of integral design can effectively recycle excessive material waste, as it is strategically located close to the source of material. The engineering design team at our study firm is currently exploring the option to source from alternative suppliers that can support either integral or modular designs, but have significantly lower effectiveness in recycling scrap material. We characterize the buyer's price sensitivity levels, component characteristics, supply chain configurations, and virgin and scrap specialty material prices that yield various design and sourcing policy alternatives. The buyer's optimal policy choice, the ensuing price–demand dynamics, and the resulting recycling implications demonstrate that the buyer can benefit from strategically tailoring his design decisions to affect the suppliers' material requirements and costs. We show that utilizing an alternative supply option is particularly valuable for components made from a material with a low price differential in virgin and scrap forms in supply chains wherein the new supplier base can recycle effectively. In such cases, the buyer induces severe price competition by dual sourcing the integral design, and competition may negate the seemingly obvious benefits of operational improvements (e.g., higher scrap material return rate).      

Strategic Supply Chain Structure Design for a Proprietary Component Manufacturer

This paper examines the choice of supply chain structure for a proprietary component manufacturer (PCM). The PCM, who is the sole supply source of a critical component used to assemble an end product, can either provide its component to an original equipment manufacturer (OEM) in the end‐product market (component supplier structure), develop the end product exclusively under its own brand (monopoly structure), or provide the component to the OEM as well as develop the end product under its own brand (dual distributor structure). Typically, the end products of the PCM and the OEM will be differentiated, and the OEM tends to have a capability advantage (compared with the PCM) in producing the end product. Our paper studies the impact of this degree of differentiation and capability advantage on the optimal choice of distribution structure. We then investigate how investing in component branding, enhancing the value of the end product, using alternative supply contracts, and product valuation uncertainty influence the PCM's optimal choice of distribution structure.     

Supply Chain Sourcing Under Asymmetric Information

We study a supply chain with two suppliers competing over a contract to supply components to a manufacturer. One of the suppliers is a big company for whom the manufacturer's business constitutes a small part of his business. The other supplier is a small company for whom the manufacturer's business constitutes a large portion of his business. We analyze the problem from the perspective of the big supplier and address the following questions: What is the optimal contracting strategy that the big supplier should follow? How does the information about the small supplier's production cost affect the profits and contracting decision? How does the existence of the small supplier affect profits? By studying various information scenarios regarding the small supplier's and the manufacturer's production cost, we show, for example, that the big supplier benefits when the small supplier keeps its production cost private. We quantify the value of information for the big supplier and the manufacturer. We also quantify the cost (value) of the alternative‐sourcing option for the big supplier (the manufacturer). We determine when an alternative‐sourcing option has more impact on profits than information. We conclude with extensions and numerical examples to shed light on how system parameters affect this supply chain.     

Outsourcing Manufacturing: Secure Price‐Masking Mechanisms for Purchasing Component Parts

This paper develops and tests a privacy‐preserving business process that supports the selection of a contract manufacturer by an original equipment manufacturer (OEM), and the determination of whether the OEM or the chosen contract manufacturer will procure each of the components to be used in the manufacture of the OEM's branded product. Our “secure price‐masking (SPM)” technology contributes to procurement theory and practice in four significant ways: First, it preserves the privacy of every party's individual component prices. Second, SPM assures that the contract manufacturers will bid their own private purchase cost (i.e., not add a margin to their cost). Third, SPM is not invertible; i.e., none of the participants can “solve” for the private inputs of any other participant based on its own inputs and the outputs provided to it by SPM. Fourth, the posterior distribution of any other participant's private inputs is practically indistinguishable from its prior distribution. We also describe the results of a proof‐of‐concept implementation.     

Sourcing Decisions with Competitive Suppliers and Imperfect Information

Manufacturers often must choose between outsourcing and producing internally. This choice is complex and influenced by a variety of factors, including the costs and capabilities of the potential suppliers. In addition, if the manufacturer outsources, he must design the sourcing process. We study the manufacturer's outsourcing decision, with a focus on the impact of the sourcing process on that decision. We consider a setting in which the manufacturer has imperfect information regarding the suppliers' costs and capabilities, and we assume that the manufacturer uses a two‐stage sourcing process. The first stage is the qualification stage, in which the manufacturer seeks to reduce the uncertainty regarding the suppliers' capabilities. The second stage is the supplier selection stage, in which the manufacturer selects among the qualified suppliers on the basis of price. We first characterize the optimal design of the two‐stage process, and then consider the outsourcing decision. We demonstrate several trade‐offs. Vertical integration enables the manufacturer to reduce uncertainty and extract all of the profits of production. However, outsourcing enables the manufacturer to take advantage of the (potentially) lower costs and higher capabilities of the suppliers, particularly if competition between suppliers can be encouraged. We find that the manufacturer is more likely to vertically integrate when the warranty cost and the cost of exerting effort during qualification are large, and when there is significant uncertainty regarding the suppliers' capabilities. The manufacturer is more likely to outsource when the suppliers' costs (capabilities) are low (high), and when the number of suppliers is large.