Dose free brand spillover always benefit? Procurement outsourcing in co-opetitive supply chains

When many original brand manufacturers (OBMs) have outsourced their manufacturing/procurement functions to competitive contract manufacturers (CMs), CMs may advertise this relationship to promote their private brand products. Faced with such brand spillover, OBMs start to restructure their outsourcing arrangements. This paper investigates the impact of brand spillover on OBMs’ outsourcing choices and whether CMs should utilize brand spillover. We construct a three-tier co-opetitive supply chain consisting of an OBM, a CM, and a material supplier. The CM who directly sells his private brand products also takes charge of procurement and manufacturing functions of the OBM’s original brand products. With such a relationship, the CM determines whether or not to commit to implementing free brand spillover. Thereafter, the OBM can decide to proceed with outsourcing her material procurement function to the competitive CM (i.e., procurement outsourcing) or switch to independently procure materials (i.e., independent procurement). Results reveal that when the CM’s initial brand power is small, the OBM chooses procurement outsourcing; otherwise, she switches to independent procurement. Interestingly, the OBM’s choice of independent procurement can benefit all the firms. Brand spillover discourages the OBM from outsourcing her procurement to the CM because it allows the CM to focus more on his private brand business and thus causes the OBM a considerably high cost to work with the CM. Although brand spillover improves the CM’s initial brand power at no cost, the CM may make a commitment by not taking free brand spillover when considering the OBM’s shift towards independent procurement. Our findings suggest that CMs with private brand should be cautious in adopting free brand spillover as a marketing tool.