Abstract
Economic globalization has swept the whole world. To focus on their main business, enterprises that are referred to as original equipment manufacturers (OEMs) outsource non-core production activities to contract manufacturers (CMs). By constructing a two-level supply chain consisting of two competing OEMs and one upstream CM, the strategic interaction of the OEMs between outsourcing and purchasing is studied. Specifically, the CM can offer custom- and predefined modes of original equipment manufacturing (namely, CO mode and PO mode, respectively). The former mode enables OEMs to determine product quality, while the latter only allows them to purchase from several quality configurations. The results show that, first, since the CO mode allows the adopter to lead the product design, whether to choose this mode depends on the required R&D cost. Interestingly, however, a lower R&D cost does not necessarily result in the adoption of the CO mode if the product quality difference is small under the PO mode. Second, the optimal purchasing strategy of an OEM is indifferent to the outsourcing mode (CO and PO) of its rival but significantly affected by the quality cost. However, compared to the PO mode, choosing the CO mode would cause the competitor to suffer more profit losses. Third, differing from the prior literature, this paper finds that when the downstream OEM can make quality decisions, although this may lead to profit loss of the contract manufacturer in some channels, it could benefit the CM overall.
Highlights
In the context of globalization, the world economy has become integrated; any enterprise only exists as a certain link or several links in the supply chain, and some low-value businesses are outsourced to other organizations to complete
While the custom original equipment manufacturers (OEMs) mode has become an important means of outsourcing high-tech enterprises, a full comparison of the two kinds of OEM modes is discussed in this paper, pricing competition, order of decision-making, contract manufacturers and the impact of supply chain member benefits
This study first investigates the strategic interaction of original equipment manufacturers between OEM mode selection and procurement strategy selection
Summary
In the context of globalization, the world economy has become integrated; any enterprise only exists as a certain link or several links in the supply chain, and some low-value businesses are outsourced to other organizations to complete. Under the custom OEM mode, the core technology or component of the product is the focus of the enterprise, and other non-core businesses can be outsourced. Taking the mobile phone industry as an example, Huawei chose to design the core SoC (system-on-chip) of mobile phones by itself and outsourced its chip production to TSMC, the world’s leading semiconductor manufacturer. Benefitting from this strategy, Huawei can focus on the demands of customers and integrate them into SoC development.
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