Strategic analysis of supplier integration and encroachment in an outsourcing supply chain

Abstract

To prevent suppliers from gaining full knowledge of production technology, original equipment manufacturers (OEMs) typically adopt a multisourcing strategy, wherein each supplier handles only a portion of the production tasks. However, a recent trend has emerged where suppliers are increasingly inclined to integrate and negotiate for control over the entire end market. The implications and impact of such integration strategies, particularly in the context of supplier encroachment, remain uncertain. In this study, we examine an OEM that outsources production tasks to two competing suppliers with varying production capabilities. The supplier with higher capacity has the potential to produce their own branded products and encroach upon the end market. To strengthen their bargaining power during the outsourcing process, the two suppliers may choose to integrate with each other. Our findings indicate that without integration, OEMs can adjust the outsourcing allocation ratio to prevent encroachment by capable suppliers. In cases of integration, although the OEM must outsource all production tasks to the integrated supplier, the likelihood of market encroachment may be reduced. Furthermore, we observe that in situations involving supplier integration and encroachment, both competitive suppliers, the OEM, and the entire supply chain can achieve a win–win–win outcome. This occurs because the supplier, acting as a market competitor, provides positive incentives for the OEM to enhance product quality, thereby maintaining market share and competitiveness. The strategic recommendations derived from our results can be valuable for supply chain members engaged in outsourcing decisions.