Manufacturing and procurement outsourcing strategies of competing original equipment manufacturers

To cope with market competition and focus on core competence, many Original Equipment Manufactur-ers (OEMs) choose to outsource their product manufacturing and/or component procurement functions to Contract Manufactures (CMs). In this paper, we aim to investigate the strategic interplay between man-ufacturing outsourcing and procurement outsourcing in a three-tier supply chain consisting of one com-ponent supplier, one common CM, and two competing OEMs. Each OEM has four outsourcing strategies: no outsourcing, manufacturing-only outsourcing, procurement-only outsourcing, and manufacturing + procurement outsourcing. We build a two-stage game model, where two OEMs simultaneously choose their outsourcing strategies in the first stage; in the second stage, the CM and two OEMs make whole-sale prices and quantity decisions based on the outsourcing structure formed in the first stage. We find that OEMs' equilibrium outsourcing strategies depend on the discount rate of component price and the fixed investment cost of manufacturing. Our analysis also reveals the strategic relationship between man-ufacturing outsourcing and procurement outsourcing: OEMs would not outsource procurement until the product manufacturing is outsourced. Moreover, there may exist Prisoners' Dilemma , where both OEMs earn higher profits when they choose manufacturing + procurement outsourcing, but neither OEM is willing to outsource procurement. Interestingly, we show that OEMs' and CM's profits may decrease with the discount rate and market potential, but increase in the fixed investment cost.(c) 2022 Elsevier B.V. All rights reserved.

Automated summary

To remain competitive and concentrate on their core competencies, many Original Equipment Manufacturers (OEMs) opt to outsource manufacturing and/or component procurement functions to Contract Manufacturers (CMs). This paper investigates the strategic dynamics between manufacturing outsourcing and procurement outsourcing in a three-tier supply chain including a component supplier, a common CM, and two rival OEMs. The research highlights the interdependency between these two types of outsourcing and identifies the conditions under which OEMs choose different outsourcing strategies.