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This study considers an original equipment manufacturer (OEM) who (a) relies on a contract manufacturer (CM) to produce its new products, and (b) engages the CM again or an independent remanufacturer (IR) to perform the remanufacturing operations of branded patented products through either authorization or outsourcing. This study chiefly investigates the optimal remanufacturing engagement strategy (i.e., engage a CM or an IR) and remanufacturing mode (i.e., authorization and outsourcing) that should be taken by an OEM. This paper derives the optimal responses of the three parties (i.e., OEM, CM, and IR) by comparing the outcomes of different remanufacturing engagement strategies and remanufacturing modes under two settings, depending on whether the wholesale price is exogenously or endogenously given. The results suggest that the OEM is better off adopting the authorization remanufacturing mode by either working with the CM or the IR when the wholesale price is exogenously given. When the wholesale price is endogenously determined by the CM, the best strategy for the OEM is to work with the IR using the outsourcing approach. The CM and the IR also show different preferences between the two modes. The IR or CM that engages in remanufacturing always prefers the outsourcing mode than the authorization mode in the two settings. However, when the CM does not engage in remanufacturing, it is better off adopting the authorization mode when the wholesale price is exogenously given or when the remanufacturing cost is relatively low in the endogenized wholesale price setting.

This paper studies the effects of international taxation on multinational firms' production outsourcing strategies, which has attracted recent attention from both practitioners and legislators. We find that under the territorial tax system, the presence of global tax disparity may result in subtle changes of a firm's production outsourcing strategy. In particular, the tax consideration can make the firm more inclined to keep material procurement in house and use buy-sell arrangement to retain profit in low tax jurisdictions. Such an effect can not only cause the firm to choose a more expensive material supplier but also overproduce the products. Therefore, besides the general concern of income shifting, tax considerations can further lead to operational distortions. We show that to reduce tax disparity while preventing tax exemption for shifted foreign profit may lead to a win-win outcome for the firm and the stakeholders. The firm will make more efficient operational decisions to obtain a higher after-tax profit at certain reduced tax rate, while the home country stakeholders can receive more tax income. Interestingly, the foreign contract manufacturer may also benefit from such a change.

When an innovator outsources the manufacturing of an innovative product to a contract manufacturer (CM) which is also a competitor in the end market, the potential innovation spillover may be a serious concern. We study an innovator’s outsourcing decision under spillover risks with an emphasis on the ex ante uncertain values of innovations, and distinguish between technical innovations which can only spill over through outsourcing and non‐technical innovations which can also spill over in the market. We find that in both cases an innovator may strategically outsource to a competitor‐CM, albeit for distinct motivations: for technical innovations, it is done so that the competitor‐CM would yield market leadership to the innovator; and for non‐technical innovations, it is done so that the competitor‐CM would face innovation uncertainties alongside the innovator.

Motivated by Google’s technology specifications on Android devices, we consider firms’ decisions on production timing in a co‐opetitive supply chain comprising a manufacturer and an original equipment manufacturer (OEM), where the manufacturer acts as the OEM’s upstream contract manufacturer and downstream competitor. We consider the market acceptance uncertainty of key product designs. If a firm decides to implement ex post production strategy (PS), it can delay the production until the market acceptance uncertainty of its product is resolved. Otherwise, ex‐ante production strategy (AS) is implemented. We find that, due to the co‐opetition, PS does not always benefit either the manufacturer or the OEM, because the value of delayed production is diminished as the competitor may commit a production quantity earlier under AS. Further, firms’ decisions on production timing are dependent on the degree of market acceptance uncertainty of their products and competition intensity. We find that both firms choose PS when uncertainty is high, while only one of them chooses PS when uncertainty is moderate or low. Interestingly, when the competition is intense, the manufacturer tends to choose PS, which can benefit from both the resolved market acceptance uncertainty and OEM’s early commitment of production quantity.

Motivated by observations in the greater China region, this paper studies a multinational firm (MNF)'s preferences between two procurement strategies in a global business environment. The MNF relies on a contract manufacturer (CM) to produce its products, which serve both markets within (domestic market) and outside (overseas market) China. The MNF is assumed to be monopolistic in the overseas market but faces competition from a local original equipment manufacturer (OEM) who outsources both manufacturing and component procurement to the CM. The MNF will decide whether to control its component procurement (consignment strategy) or delegate that function to the CM (turnkey strategy). Our study indicates that a number of factors unique to the global supply chain environment, such as a multi-market structure with different sizes and natures of competition, and a set of tax rules that gives differential treatment to products serving different markets, have the potential of impacting the MNF's choice of consignment vs. turnkey strategies, sometimes in interesting ways. In particular, we find that when attempting to balance the pros and cons of cooperating with the local OEM under turnkey while competing against it in the domestic market, the MNF's preference could switch twice from turnkey to consignment and back to turnkey, and its global profits could first decrease and then increase, as the domestic market grows. Our study also highlights the importance of making a company's global supply chain management decisions while considering international tax rules.

Since 2000, particularly in the aftermath of the 2008 global financial crisis, China's ‘world factory’ has undergone dramatic transformation in response to the changing business environment at global, national, local and firm levels. A rich body of literature has examined the spatial transformation of manufacturing firms from coastal to inland China, while little attention has been paid to the market shift engaged by export-oriented firms, particularly from exports towards China's domestic market. Taking electronics industry as a case, this study examines the process and trajectories of production relocation and market rebalancing of electronics firms during the period of 1998 and 2009. Drawing upon the global production networks (GPNs) framework, particularly the evolutionary strategic coupling, decoupling and recoupling dynamics, the study argues that China's ‘world factory’ has been restructured through divergent decoupling of electronics production and exports from coastal regions, for example, the Pearl River Delta (PRD) on the one hand, and selective recoupling with a small number of cities in inland regions and Yangtze River Delta. The spatial expansion of electronics exports and changing ratio of exports to sales outputs among various provinces elucidates the emerging attempts at developing domestic market-oriented production networks, yet with limited penetration to the domestic market. Through transition from structural coupling to selective recoupling, electronics firms like Foxconn, a Taiwan-based contract manufacturer for global lead firms, for example, Apple, have strategically leveraged among diverse regional production networks in China. The findings of the study could enrich the developing literature of GPNs, particularly the dynamic strategic coupling, decoupling and recoupling in the evolution of regional production networks in the changing global economy.

This paper studies the optimal component procurement strategies of two competing OEMs selling substitutable products. The OEMs outsource their production to a common contract manufacturer, who in turn needs an input from a component supplier. Each OEM may either directly procure the input from the component supplier, or delegate the procurement task to the contract manufacturer. We first analyze the OEMs' procurement game under a non-strategic supplier whose component price is exogenously given. It is found that symmetric equilibria arise for most situations, that is, both OEMs either control or delegate their component procurement in equilibrium. Interestingly, despite the commonly-held belief that the contract manufacturer would be worse off as OEMs gain component procurement control, we show that the contract manufacturer may enjoy a higher profit. Then we study the OEMs' procurement game under a strategic supplier who can set its component price. We find that the supplier's strategic pricing behavior plays a critical role in the equilibrium procurement structure. In particular, in the equilibrium under strategic supplier, the larger OEM always uses delegation while the smaller OEM may use either delegation or control. By identifying the driving forces behind the OEMs' procurement choices, this research helps explain observed industry practices and offer useful guidelines for firms' component sourcing decisions. [ABSTRACT FROM AUTHOR]

Outsourcing stretches supply chains longer with added contract manufacturers responsible for the manufacturing of parts and final products. Should a firm change its quality management approach as its supply chain becomes longer with outsourced manufacturing? This paper studies a brand owner's optimal choice between two commonly used quality management approaches: an inspection-based approach and an external failure-based approach, in two supply chains – a dyadic supply chain and a multi-level supply chain where the brand owner outsources manufacturing to an independent contract manufacturer. Our study finds that the brand owner's optimal choice between the two quality management approaches could be opposite in the two supply chains. Specifically, we show that if agency costs exist between the contract manufacturer and the brand owner, the brand owner may prefer an inspection-based approach in the multi-level supply chain in contrast to preferring an external failure-based approach in the dyadic supply chain. In particular, inspections can be effective for the brand owner to limit the manufacturer's profit by excluding defective finished products and components, which in turn reduce agency costs in the multi-level supply chain. Hence, the efficiency of an inspection-based approach relative to an external failure-based approach can be higher in the multi-level supply chain as compared to the dyadic one. Our findings suggest that firms should adjust to changes in supply chain structures and re-evaluate the efficiencies of different quality management approaches accordingly.

Brand-owing firms have been outsourcing the production of complete finished products to contract manufacturers (CMs) for some time. Increasingly, brand-owning firms have been employing CMs to produce products for which performance ambiguity is high. Doing so poses challenges for the management of CM performance. As expected, we find that quality performance ambiguity has a significant negative relationship with CM conformance quality performance, as reported by the buyers (the brand-owning firms). Drawing from and expanding the quality management (QM) literature, we assess the effectiveness of key constructs, derived primarily from the “supplier QM” meta-construct, at mitigating the detrimental effect of ambiguity. Two constructs consistently moderate the ambiguity-CM quality performance link. Heavily emphasizing quality at the time of CM selection moderates this relationship in the expected direction ( i.e. , it mitigates the challenges created by ambiguity). Surprisingly, we find that using one CM amplifies the negative relationship between ambiguity and conformance quality performance. One possible explanation is that employing only one CM aggravates existing opportunism concerns with regard to conformance quality performance under high levels of ambiguity.

We study a supply chain in which an original equipment manufacturer (OEM) and a contract manufacturer (CM) compete in the finished goods market. The OEM can decide whether to outsource the intermediate good, a critical component for producing the finished good, from the CM or make in-house production. Technology transition improves the CM's production efficiency, and it can take two different forms: a direct technology transfer from the OEM to the CM or technology spillovers through outsourcing from the OEM to the CM. We document the possibility of strategic outsourcing, that is, the CM supplies the intermediate good to the OEM when she is less efficient than the OEM's in-house production. We find that technology spillovers can strengthen the incentive for strategic outsourcing. Furthermore, compared with direct technology transfers, outsourcing coupled with technology spillovers may generate more technology transition. Outsourcing is a particularly appropriate channel for implicit collusion when the OEM is not very efficient with the production of the intermediate good. Our results suggest that ex post competition on the finished goods can create room for ex ante collaboration and provide some implications on the OEM's outsourcing strategies when facing a competitive CM.© 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 501–514, 2014

This paper studies contract renegotiation in a stylized supply chain model. Two original equipment manufacturers (OEMs) sign fixed-quantity contracts with a contract manufacturer (CM) prior to demand realization. Contract renegotiation after demand realization allows the OEMs to use capacity that is more or less than what they contracted for. We assume that the extra profit due to efficient allocation of capacity is allocated to the supply chain parties according to the egalitarian rule and investigate when an OEM's expected post-renegotiation profit is maximized. We aim to understand how an OEM's expected post-renegotiation profit is affected by her ability to negotiate a low wholesale price in the initial contract as well as the ability of the other OEM to do the same. Regardless of whether renegotiation is anticipated or not at the time of the initial contract, we find that an OEM, who had weak buyer power vis-a-vis the CM and was unable to negotiate a low wholesale price in the initial contract, may benefit more from renegotiation than a stronger OEM. In addition, we show that how the expected post-renegotiation profit of an OEM changes with demand variance or anticipating renegotiation depends on the strength of the OEM's buyer power. Finally, we numerically test the robustness of our results in a supply chain with three OEMs and also identify when the OEMs prefer to leave the CM out of the renegotiation.

Does the outsourcing of manufacturing trigger a cascade of follow-on outsourcing, wherein related procurement activities are subsequently entrusted to one's outsourcing partner? We explored this question in a survey of US-based electronics original equipment manufacturers (OEMs) who have outsourced production to a contract manufacturer (CM). Transaction-cost economics and the resource-based view were used as theoretical lenses to assess six potential drivers of this decision, utilizing direct and indirect-effects structural models across five phases of procurement activity. Results suggest that some sets of conditions appear to lend themselves to a “wholesale” outsourcing approach, wherein the CM is entrusted to both manufacture a product and engage in various procurement activities. Other conditions foster a more “retail” approach to procurement outsourcing, with limited or no follow-on outsourcing of procurement activities. In general, firms seem more comfortable outsourcing tactical procurement activities, entrusting strategic activities to CMs only when the product is highly commoditized or when the CM controls access to international resources the OEM is unable to leverage on its own. Overall, the relationship between manufacturing and procurement outsourcing is complex and contingent on a variety of factors.

In a three-tier supply chain comprising an original equipment manufacturer (OEM), a contract manufacturer (CM), and a supplier, there exist two typical outsourcing structures: control and delegation. Under the control structure, the OEM contracts with the CM and the supplier respectively. Under the delegation structure, the OEM contracts with the CM only and the CM subcontracts with the supplier. We compare the two outsourcing structures under a push contract (whereby orders are placed before demand is realized) and a pull contract (whereby orders are placed after demand is realized). For all combinations of outsourcing structures and contracts, we derive the corresponding equilibrium wholesale prices, order quantities, and capacities. We find that the equilibrium production quantity is higher under control than under delegation for the push contract whereas the reverse holds for the pull contract. Both the OEM and the CM prefer control over delegation under the push contract. However, under the pull contract, the OEM prefers control over delegation whereas the CM and the supplier prefer delegation over control. We also show that for a given outsourcing structure, the OEM prefers the pull contract over the push contract. In extending our settings to a general two-wholesale-price (TWP) contract, we find that when wholesale prices are endogenized decision variables, the TWP contract under our setting degenerates to either a push or a pull contract.

This study investigates a supply chain comprising an original equipment manufacturer (OEM) and a contract manufacturer (CM), in which the CM acts as both upstream partner and downstream competitor to the OEM. The two parties can engage in one of three Cournot competition games: a simultaneous game, a sequential game with the OEM as the Stackelberg leader, and a sequential game with the CM as the Stackelberg leader. On the basis of these three basic games, this study investigates the two parties' Stackelberg leadership/followership decisions. When the outsourcing quantity and wholesale price are exogenously given, either party may prefer Stackelberg leadership or followership. For example, when the wholesale price or the proportion of production outsourced to the CM is lower than a threshold value, both parties prefer Stackelberg leadership and, consequently, play a simultaneous game in the consumer market. When the outsourcing quantity and wholesale price are decision variables, the competitive CM sets a wholesale price sufficiently low to allow both parties to coexist in the market, and the OEM outsources its entire production to this CM. This study also examines the impact of the supply chain parties' bargaining power on contract outcomes by considering a wholesale price that is determined via the generalized Nash bargaining scheme, finding a Stackelberg equilibrium to be sustained when the CM's degree of bargaining power is great and the non-competitive CM's wholesale price is high.

We consider a large original equipment manufacturer (OEM) who relies on a contract manufacturer (CM) to produce her product. In addition to the OEM's product, the CM also produces for a smaller OEM. Both the larger OEM and the CM can purchase the component from the supplier, but their purchase prices may differ and remain unknown to each other. The main question we address is whether the larger OEM should retain component procurement by purchasing components from the supplier and reselling to the CM (buy–sell), or outsource component procurement by letting the CM purchase directly from the supplier (turnkey). We show that, under buy–sell, the larger OEM's optimal strategy is to resell components at the highest possible component purchase price of the CM (i.e., the street price). By comparing buy–sell and turnkey, we find that a CM with low component price is better off under turnkey, even though under buy–sell he receives more profits through the products sold to the smaller OEM. Furthermore, the larger OEM's preference between buy–sell and turnkey depends on her component price, the volatility of the CM's component price and substitutability between the two products.

AccuRounds, a profitable, family-run precision manufacturing subcontractor, began investigating lean techniques in the mid-1990s, when its owners realized the company had to find ways to engage and empower its workforce if it was to not only weather the economic and technological challenges it faced, but also continue to grow and prosper. Despite being a subtier supplier without a product of its own, the firm captured a Northeast Shingo Prize Silver Medal for its achievements, and then used feedback from the judges to institute additional physical and operational changes, including value stream mapping and an employee bonus program. The resulting improvements in delivery, quality, and cost prove that even a contract manufacturer can reap great rewards from the diligent application of lean strategies. © 2011 Wiley Periodicals, Inc.

This paper develops and tests a privacy-preserving business process that supports the selection of a contract manufacturer by an original equipment manufacturer (OEM), and the determination of whether the OEM or the chosen contract manufacturer will procure each of the components to be used in the manufacture of the OEM’s branded product. Our ‘‘secure price-masking (SPM)’’ technology contributes to procurement theory and practice in four significant ways: First, it preserves the privacy of every party’s individual component prices. Second, SPM assures that the contract manufacturers will bid their own private purchase cost (i.e., not add a margin to their cost). Third, SPM is not invertible; i.e., none of the participants can ‘‘solve’’ for the private inputs of any other participant based on its own inputs and the outputs provided to it by SPM. Fourth, the posterior distribution of any other participant’s private inputs is practically indistinguishable from its prior distribution. We also describe the results of a proof-of-concept implementation.

The contract manufacturing industry has grown rapidly in recent years as firms have increasingly outsourced production to reduce costs. This growth has created powerful contract manufacturers (CMs) in several industries. Achieving a competitive cost position is often a primary motive for outsourcing. Outsourcing influences both the original equipment manufacturer's (OEM) and the CM's production levels, and, therefore, through learning-by-doing renders future costs dependent on past outsourcing decisions. As such, outsourcing should not be viewed as a static decision that, once made, is not revisited. We address these considerations by analyzing a two-period game between an OEM and a powerful CM wherein both firms can reduce their production costs through learning-by-doing. We find that partial outsourcing, wherein the OEM simultaneously outsources and produces in-house, can be an optimal strategy. Also, we find that the OEM's outsourcing strategy may be dynamic—i.e., change from period to period. In addition, we find both that the OEM may engage in production for leverage (i.e., produce internally when at a cost disadvantage) and that the CM may engage in low balling. These and other findings in this paper demonstrate the importance of considering learning, the power of the CM, and future periods when making outsourcing decisions.

We study a supply chain where an original equipment manufacturer (OEM) buys subassemblies, comprised of two complementary sets of components, from a contract manufacturer (CM). The OEM provides a demand forecast at the time when the CM must order the long lead-time set of components, but must decide whether or not to provide updated forecasts as a matter of practice. Forecast updates affect the CM's short lead-time purchase decision, and the anticipation of updates may also affect the long lead-time purchase decision. While the OEM and CM both incur lost sales costs, the OEM can decide whether or not to share the overage costs otherwise fully borne by the CM. We investigate when the OEM is better served by committing to provide updated forecasts and/or committing to share overage costs. For a distribution-free, two-stage forecast-update model, we show that (1) the practice of providing forecast updates may be harmful to the OEM and (2) at the OEM's optimal levels of overage risk sharing, the CM undersupplies relative to the supply chain optimal quantity. For a specific forecast-update model, we computationally investigate conditions under which forecast updating and risk sharing are in the best interest of the OEM.

Several firms are interested in manufacturing and selling new products based on a new process technology. Before manufacturing can begin, either these Original Equipment Manufacturers (OEMs), or a Contract Manufacturer (CM) needs to adopt the process technology, i. e., make a capacity investment in it. Due to market uncertainty, the timing of capacity investment is crucial. In such a setting, we investigate how the timing of process adoption, an important determinant of time-to-market, is impacted by the make/buy decision. We first characterize the optimal time for process adoption and show that this delay depends on competitive intensity, cost structure and the rate of forecast improvement. Due to differing cost structures, incentives and risks, an OEM and a CM may invest in a new process technology at different times. We show that while there are conditions where outsourced manufacturing can be advantageous for the OEM from a time-to-market perspective, there are also cases where the OEM would be disadvantaged. In these cases, the OEM can accelerate process adoption by risk sharing through joint investment. Finally, the right choice of CM is extremely important for an OEM that faces a short time window for product introduction: An efficient CM not only provides low costs but also rapid access to new process technologies, and therefore higher revenues.

We study a component inventory planning problem in an assemble-to-order environment faced by many contract manu- facturers in which both quick delivery and efficient management of component inventory are crucial for the manufacturers to achieve profitability in a highly competitive market. Extending a recent study in a similar problem setting by the same authors, we analyze an optimization model for determining the optimal component stocking decision for a contract manufacturer facing an uncertain future demand, where product price depends on the delivery times. In contrast to our earlier work, this paper considers the situation where the contract manufacturer needs to deliver the full order quantity in one single shipment. This delivery requirement is appropriate for many industries, such as the garment and toy industries, where the economies of scale in transportation is essential. We develop efficient solution procedures for solving this optimization problem. We use our model results to illustrate how the different model parameters affect the optimal solution. We also compare the results under this full-shipment model with those from our earlier work that allows for multiple partial shipments. © 2007 Wiley Periodicals, Inc. Naval Research Logistics 54: 510-523, 2007

The contract manufacturing of biologics under current Good Manufacturing Practice (cGMP) regulations presents many unique compliance issues. The goal of any cGMP manufacturing organisation is to provide high quality products in a cost effective and timely manner using controlled and well-documented procedures. For contract manufacturers, the accomplishment of this goal is particularly challenging due to the multiple products that are made and the variety of processes required for their production. A contract manufacturer must design a facility and operations plan capable of managing the variety of projects they may be asked to perform. The firm must also develop detailed policies and procedures regarding all of its operations to ensure compliance with all cGMP and safety regulations, as well as client expectations. © 1997 John Wiley & Sons, Ltd.

Reactive compounding is continuously emerging as a novel processing technique to modify existing polymer systems and improve performance/properties. The essential elements of control over the internal pressure and temperature combined with understanding of the chemistry and process equipment brings optimal results. Today's role of contract manufacturer is not only to provide the facilities and hardware but also the understanding of process technology to help develop new products in the most economic and timely fashion. © 1992 John Wiley & Sons, Inc.