Strategic procurement outsourcing with asymmetric cost information under scale economies

Abstract

This paper considers a supply chain in which an original equipment manufacturer (OEM) outsources her production to a contract manufacturer (CM). For the product’s component, the OEM can either control the component procurement (i.e., control strategy), or delegate this work to the CM (i.e., delegation strategy). Meanwhile, they have different discount abilities for the procurement cost due to scale economies. Moreover, the CM’s discount ability is private information for himself. In the scenario where a non-competitive CM doesn’t have own brand products, the control strategy is superior to the delegation strategy for the OEM. In contrast, when the CM is competitive (with own brand production ability), the delegation strategy is optimal. This result is interesting and implies that the OEM prefers to adopt the delegation strategy because of the discount sharing effect, although the CM has private information in this case. Finally, the results of numerical simulation show that the CM’s competition can create a win–win situation under some certain conditions.