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Strategic procurement outsourcing with asymmetric cost information under scale economies

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  • Binwei Dong
  • Wansheng Tang
  • Chi Zhou

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.

Suggested Citation

  • Binwei Dong & Wansheng Tang & Chi Zhou, 2018. "Strategic procurement outsourcing with asymmetric cost information under scale economies," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 69(11), pages 1751-1772, November.
    • Handle: RePEc:taf:tjorxx:v:69:y:2018:i:11:p:1751-1772
    DOI: 10.1080/01605682.2017.1409155
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    Citations

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    Cited by:

    1. Matsui, Kenji, 2019. "A supply chain member should set its margin later if another member's cost is highly uncertain," European Journal of Operational Research, Elsevier, vol. 275(1), pages 127-138.
    2. Dong, Binwei & Tang, Wansheng & Zhou, Chi & Ren, Yufei, 2021. "Should original equipment manufacturer assist noncompetitive contract manufacturer to expand capacity?," Omega, Elsevier, vol. 103(C).
    3. Dong, Binwei & Ren, Yufei & McIntosh, Christopher, 2023. "A co-opetitive newsvendor model with product substitution and a wholesale price contract," European Journal of Operational Research, Elsevier, vol. 311(2), pages 502-514.
    4. Yoo, Seung Ho & Choi, Thomas Y. & Kim, DaeSoo, 2021. "Integrating sourcing and financing strategies in multi-tier supply chain management," International Journal of Production Economics, Elsevier, vol. 234(C).
    5. Dong, Binwei & Tang, Wansheng & Zhou, Chi & Ren, Yufei, 2021. "Is dual sourcing a better choice? The impact of reliability improvement and contract manufacturer encroachment," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 149(C).
    6. Lv, Fei & Xiao, Lei & Xu, Minghui & Guan, Xu, 2019. "Quantity-payment versus two-part tariff contracts in an assembly system with asymmetric cost information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 129(C), pages 60-80.

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