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Strategic outsourcing decisions for manufacturers competing on product quality

Author

Listed:
  • Tiaojun Xiao
  • Yusen Xia
  • G. Zhang

Abstract

This article examines strategic outsourcing decisions for two competing manufacturers whose key components have quality improvement (QI) opportunities. We consider the effects of vertical and horizontal product differentiation on demand. In deriving the Subgame Perfect Nash Equilibria (SPNE), it is shown that either a symmetric outsourcing strategy (i.e., both manufacturers outsource) or an asymmetric sourcing strategy profile (i.e., manufacturers use different sourcing strategies) can be an SPNE. Insights are provided into how sourcing strategies are affected by the factors such as fixed setup cost, unit production cost, QI efficiency, and horizontal and vertical differentiations. It is found that larger horizontal differentiation expands the range over which symmetric outsourcing is an equilibrium. In addition, the outsourcing manufacturer may provide a higher QI level, produce a higher quantity, and offer a lower retail price than the insourcing one in the asymmetric sourcing setting. On the other hand, the insourcing manufacturer should pay more attention to the effect of the rival's sourcing strategy on the QI level than the outsourcing one. Finally, it is shown that all players have an incentive to determine sourcing partner relationships before the wholesale price contract is offered.

Suggested Citation

  • Tiaojun Xiao & Yusen Xia & G. Zhang, 2014. "Strategic outsourcing decisions for manufacturers competing on product quality," IISE Transactions, Taylor & Francis Journals, vol. 46(4), pages 313-329.
    • Handle: RePEc:taf:uiiexx:v:46:y:2014:i:4:p:313-329
    DOI: 10.1080/0740817X.2012.761368
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    Citations

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    Cited by:

    1. Li, Wei & Chen, Jing, 2020. "Manufacturer’s vertical integration strategies in a three-tier supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 135(C).
    2. Mandal, Prasenjit & Jain, Tarun, 2021. "Partial outsourcing from a rival: Quality decision under product differentiation and information asymmetry," European Journal of Operational Research, Elsevier, vol. 292(3), pages 886-908.
    3. Prasenjit Mandal & Tarun Jain & Abhishek Chakraborty, 2021. "Quality collaboration contracts under product pricing strategies," Annals of Operations Research, Springer, vol. 302(1), pages 231-264, July.
    4. Pournader, Mehrdokht & Kach, Andrew & Fahimnia, Behnam & Sarkis, Joseph, 2019. "Outsourcing performance quality assessment using data envelopment analytics," International Journal of Production Economics, Elsevier, vol. 207(C), pages 173-182.
    5. Li, Dan & Chen, Jing & Liao, Yi, 2021. "Outsourcing strategy in the presence of the customer returns," International Journal of Production Economics, Elsevier, vol. 240(C).
    6. Garvan Whelan & Paul Hanly & Vincent O’Connell & Oldřich Ludwig Dittrich & Naser Abu Ghazalah, 2021. "Impact on Firm Liquidity Arising from Outsourcing Decisions as Evidenced by Off-Balance-Sheet Disclosures," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 27(1), pages 17-27, February.
    7. Wu, Xiangxiang & Zha, Yong & Yu, Yugang, 2022. "The developer’s sourcing strategy in the presence of a competing manufacturer and consumers’ two-dimensional differentiated preferences," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 158(C).
    8. Chen, Kebing & Xiao, Tiaojun, 2015. "Outsourcing strategy and production disruption of supply chain with demand and capacity allocation uncertainties," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 243-257.
    9. Xinjian Wu & Chao Yu & Suyong Zhang, 2022. "Quality level and outsourcing strategies in a three-tier low-carbon supply chain [Delegation vs. control in low-carbon supply chain procurement under competition]," International Journal of Low-Carbon Technologies, Oxford University Press, vol. 17, pages 980-990.
    10. Chen, Jingxian & Liang, Liang & Yang, Feng, 2015. "Cooperative quality investment in outsourcing," International Journal of Production Economics, Elsevier, vol. 162(C), pages 174-191.
    11. Li, Wei & Zhao, Xuan & Chen, Jing, 2023. "Co-opetition or decentralization? A study of manufacturers’ sourcing and distribution strategies," European Journal of Operational Research, Elsevier, vol. 311(3), pages 867-886.
    12. Anna Nagurney & Dong Li, 2015. "A supply chain network game theory model with product differentiation, outsourcing of production and distribution, and quality and price competition," Annals of Operations Research, Springer, vol. 226(1), pages 479-503, March.
    13. Zhao, Ming & Dong, Ciwei & Cheng, T.C.E., 2018. "Quality disclosure strategies for small business enterprises in a competitive marketplace," European Journal of Operational Research, Elsevier, vol. 270(1), pages 218-229.
    14. Kebing Chen & Tiaojun Xiao, 2015. "Production planning and backup sourcing strategy of a buyer-dominant supply chain with random yield and demand," International Journal of Systems Science, Taylor & Francis Journals, vol. 46(15), pages 2799-2817, November.
    15. Li, Wei & Zhao, Xuan, 2022. "Competition or coopetition? Equilibrium analysis in the presence of process improvement," European Journal of Operational Research, Elsevier, vol. 297(1), pages 180-202.
    16. Chen, Jingxian & Liang, Liang & Yao, Dong-qing, 2019. "Factory encroachment and channel selection in an outsourced supply chain," International Journal of Production Economics, Elsevier, vol. 215(C), pages 73-83.

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