The Impacts of Channel Structure and Information on an OEM’s Procurement Strategy

Abstract

This paper investigates the optimal procurement strategy for an original equipment manufacturer (OEM) under different information and channel structures. We consider two possible sourcing strategies, Consignment and Turnkey, in which Consignment represents the situation when an OEM procures components itself and only assigns the production activity to a contract manufacturer (CM) and Turnkey is defined as when an OEM delegates both the procurement and production activities to the CM. We specifically consider two channel structures, a single channel with one OEM and one CM and two competing channels in which each consists of an OEM and a CM. Under each channel structure, the CM’s purchasing cost may be public or private information. We find that under both channel structures, in the absence of information asymmetry, the OEM will always choose Turnkey if its cost is higher than the CM’s average cost. However, in the presence of information asymmetry, the OEM is more likely to adopt Consignment with the increase in market size. We also find that when the two CMs’ cost correlation is small (large), the structure of the competing channels increases the possibility that the OEM adopts Turnkey (Consignment) in equilibrium.