Outsourcing strategy of an original equipment manufacturer in a sustainable supply chain: Whether and how should a contract manufacturer encroach?

Abstract

This study investigates the strategic interaction of encroachment and outsourcing strategies between a contract manufacturer (CM) and an original equipment manufacturer (OEM) in a sustainable supply chain, whether economically or environmentally sustainable. The CM has two encroachment modes, i.e., wholesale encroachment (including two formats, i.e., encroachment with retail cooperation or competition) or retail encroachment (including two formats, i.e., integrated or decentralized encroachment), and the OEM has two outsourcing strategies, i.e., consignment or turnkey. We find that the CM always benefits from encroachment, whereas the OEM might benefit or damage from encroachment. Interestingly, this paper breaks the traditional notion that more competitors mean less profit, and demonstrates that if turnkey is selected and environmental investment cost is low, the “win–win” situation might be achieved regardless of any encroachment format. Moreover, when the CM encroaches on the wholesale market, encroachment with retail cooperation could soften the wholesale competition, and thus increase the OEM’s post-encroachment profitability. Although we propose that the OEM has a short-sighted behavior in outsourcing strategy selection, surprisingly, this behavior unconsciously endows OEM an outsourcing deterrence that could limitedly deter CM encroachment by converting established outsourcing strategies. More surprisingly, if the deterrence is credible, the CM’s corresponding transfer payment could result in “doing well by doing good” by promoting the common sustainability of the economy and environment. Furthermore, we highlight a distinct evaluation index of CM encroachment in a sustainable supply chain: despite the importance of total environmental impact, more motivation for encroachment might emerge and further stimulate market vitality if the index is relaxed to average environmental impact.