Should competing original equipment manufacturers outsource procurement activities under asymmetric cost information?

Abstract

This paper considers a supply chain in which two competing heterogeneous original equipment manufacturers (OEMs) outsource production to a common contract manufacturer (CM) that possesses private cost information. Along with production outsourcing, the OEMs can either purchase components by themselves and only assign the production tasks to the CM (Consignment), or delegate both the procurement and production tasks to the CM (Turnkey). The main question we address is whether the OEMs should adopt Consignment or Turnkey. To answer this question, we first analyse the OEMs’ optimal mechanism design problems under three scenarios: both OEMs adopt Consignment strategy; both OEMs adopt Turnkey strategy; one OEM adopts Consignment and the other one adopts Turnkey. Building upon the OEMs’ equilibrium decisions under each scenario, we then characterise the equilibrium outcome for the procurement game. The results show that the CM’s procurement cost distribution and the market size play critical roles in the equilibrium outcome. Additionally, we find that both the competition intensity and cost heterogeneity between the OEMs affect the equilibrium outcome.

Keywords:

• consignment
• turnkey
• procurement
• outsourcing
• competition
• asymmetric cost information

Acknowledgements

The author sincerely thanks the editor in chief Alexandre Dolgui and two anonymous reviewers for their constructive comments and suggestions to improve the paper.

Additional information

Funding

The author has also benefited from the support from National Natural Science Foundation of China (grant number 71602189) and Youth Foundation for Humanities and Social Sciences of Ministry of Education of China (grant number 16YJC630083)