Strategic procurement outsourcing with asymmetric cost information under scale economies

Binwei DONG, Wansheng TANG*, Chi ZHOU

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

20 Citations (Scopus)

Abstract

This paper considers a supply chain in which an original equipment manufacturer (OEM) outsources her production to a contract manufacturer (CM). For the product’s component, the OEM can either control the component procurement (i.e., control strategy), or delegate this work to the CM (i.e., delegation strategy). Meanwhile, they have different discount abilities for the procurement cost due to scale economies. Moreover, the CM’s discount ability is private information for himself. In the scenario where a non-competitive CM doesn’t have own brand products, the control strategy is superior to the delegation strategy for the OEM. In contrast, when the CM is competitive (with own brand production ability), the delegation strategy is optimal. This result is interesting and implies that the OEM prefers to adopt the delegation strategy because of the discount sharing effect, although the CM has private information in this case. Finally, the results of numerical simulation show that the CM’s competition can create a win–win situation under some certain conditions.

Original languageEnglish
Pages (from-to)1751-1772
Number of pages22
JournalJournal of the Operational Research Society
Volume69
Issue number11
Early online date16 Jan 2018
DOIs
Publication statusPublished - Nov 2018
Externally publishedYes

Bibliographical note

This work is supported by the National Natural Science Foundation of China [grant number 71771164], [grant number 71702129]; Humanity and Social Science Youth Foundation of Ministry of Education of China [grant number 17YJC630232].

Keywords

  • component procurement
  • contract theory
  • information asymmetry
  • production outsourcing
  • scale economies

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