Design outsourcing in the fashion supply chain: OEM versus ODM

Abstract

Design innovation is the engine of fashion. Many fashion firms outsource design innovation to their suppliers. Design outsourcing is on the rise in the fashion supply chain, but research in this area lags behind industry practice. In this paper, we examine how design outsourcing affects the supply chain, and we compare supply chain performance under an Original Equipment Manufacturer (OEM) strategy versus an Original Design Manufacturer (ODM) strategy. We evaluate a market size outsourcing model where design enhancement influences market size, and a success probability outsourcing model where design enhancement influences the success probability of innovation. We find that when the supplier trades with the retailer via a wholesale price contract under the ODM strategy, the supplier has no incentive to invest in innovation. In the market size outsourcing model, the design innovation in the centralized supply chain is higher than that under the OEM strategy. However, in the success probability outsourcing model, the success probability of innovation under the OEM strategy is higher than that in the centralized supply chain. Furthermore, we find that a profit sharing contract can achieve supply chain coordination under both OEM and ODM strategies; whereas, revenue sharing and buyback contracts cannot.