Essays on contract manufacturing

Abstract

In recent decades, contract manufacturing has been increasingly adopted in industries such as telecommunication and personal computer industry. By outsourcing the production to the contract manufacturers (CMs), the original equipment manufacturers (OEMs) can better focus on their core competencies such as product design and marketing and at the same time enjoy the benefits of reduced labor costs, freed-up capital, and improved worker productivity (Arruñda and Vázquez 2006). This dissertation consists of three parts, each investigating a decision-making issue on contract manufacturing: (1) The outsourcing structure selection, (2) the price negotiation, quantity commitment and capacity installing,(3) the choice over quantity leadership/followship when the CM becomes a downstream competitor of the OEM. In the first essay, we consider a multi-tier supply chain consisting of an OEM, a CM and a supplier and study two outsourcing structures, control and delegation. Under control, the OEM takes a direct control over procurement of raw materials/components and the CM is only responsible for manufacturing. Under delegation, the CM performs both manufacturing and the procurement functions for the OEM. Which structure is more beneficial for the OEM, the CM or the supplier? Towards this question, we study the performance of supply chain parties under the two sourcing structures and we consider different supply chain contracts such as push, pull and two-wholesale-price (TWP) contracts. We derive the equilibrium ordering quantities and capacities for all the combinations of the outsourcing structures and contracts. We show that under the push contract, the OEM prefers delegation to control if the wholesale price it pays to the CM under delegation is no more than the sum that it pays to the CM and the supplier under control. As to the pull contract, we find that the OEM is more likely to prefer delegation if the wholesale price under delegation is in a moderate range and the customer demand has low uncertainty. For the TWP contract, we find that the preference of the OEM between control and delegation depends on the wholesale price and cost structures. And delegation is also more likely to be preferred under the TWP contract if the customer demand has low uncertainty. Lastly, we find that for any given vertical outsourcing structure, the OEM prefers the pull contract to the push contract if the prebook prices are very high or at-once wholesale prices are in a moderate range. Based on the work on the first issue, we continue to investigate the comparison of outsourcing structures when the wholesale prices are endogenized. The second essay assumes that wholesale prices are decided via a cooperative generalized Nashbar gaining (GNB) game. We examine price negotiation, quantity commitment and capacity installing issues under four scenarios classified according to the vertical outsourcing structure and the timing of quantity ordering. Similar with essay 1, we consider two outsourcing structures, control and delegation. On the timing of quantity ordering, we consider two inventory/capacity risk allocation contracts: Push and pull. For each scenario, we derive the negotiation-induced wholesale prices and equilibrium ordering/capacity decisions. We find that compared with control, delegation always generates a lower procurement price for the OEM, which, however, may reduce the supplier's capacity building-up incentives. We also find that push contract plays an important role in coordinating the supply chain when the CM and the supplier have unbalanced capacity set-up incentives and/or the demand uncertainty is large. We show the company shall adopt control strategy over the key components while delegate the procurement of commodity components to the CM. The third essay is quite different from the above two. This part studies a supply chain that consists of an OEM and a CM, where the CM is both an upstream partner and a downstream competitor of the OEM. They can engage in one of the following Cournot competition games: a "simultaneous"-move game, a sequential game with the OEM as the Stackelberg leader and a sequential game with the CM as the Stackelberg leader. Based on these three basic games, we then investigate the two parties' decisions on choosing Stackelberg leadership or followership. When the outsourcing quantity and the wholesale price are exogenously given, both the Stackelberg leadership and followership can be preferred by either party. In particular, when the wholesale price or the proportion of the production outsourced to the CM is lower than a threshold value, both parties prefer Stackelberg leadership and consequently, a "simultaneous"-move game is played in the consumer market. When the outsourcing quantity and the whole sale price are decision variables, the OEM prefers outsourcing entirely from the competitive CM and the competitive CM will set a wholesale price low enough to allow both parties to coexist in the market. We find that a Stackelberg equilibrium is sustained when the competitive CM has a large bargaining power and the non-competitive CMs' wholesale price is high enough.