3D Printing Spare Parts via IP Licensing Contracts

Abstract

Additive manufacturing, also known as 3D printing, has the potential to shift supply chains from global networks that rely on centralized production with traditional manufacturing technologies to mainly digital networks with distributed, local printing. Particularly well positioned to drive this transition are original equipment manufacturers (OEMs) who design and produce capital goods. We consider an OEM supplying a single part to multiple buyers over an infinite horizon. We study how the OEM can digitize the spare parts supply chain by leveraging 3D printing via intellectual property (IP) licensing. We first set up a benchmark model of the traditional physical supply chain with centralized production by the OEM. We then propose the OEM to act as an IP licensor by selling spare parts designs, rather than physical parts. With the license agreement, a buyer can print parts locally through a third-party printing service provider, enjoying a shorter lead time and lower setup cost. Given a license, each buyer chooses whether to switch to the IP licensing channel or stay in the traditional channel. The OEM selects the license terms to maximize the total profit across both channels. We characterize the OEM’s optimal license and the resulting supply chain configuration. We show that 3D printing’s competency in price plays a dominant role in production decentralization. The conventional wisdom that 3D printing is suitable for slow moving parts holds only when it is competent along several dimensions. In a numerical experiment with realistic parameter settings, decentralized production occurs in a surprisingly large number of cases, and the proposed new business model can significantly increase the OEM’s profit. Our results indicate that IP licensing by OEMs can become a major enabler in the transition to digital supply networks with distributed 3D printing, benefiting all parties involved.