TY - JOUR
T1 - How to outsource production considering quality management
T2 - Turnkey or buy-sell?
AU - Zhang, Manman
AU - Zhang, Juliang
AU - Sun, Yue
AU - Cheng, T. C.E.
N1 - Funding Information:
We thank the Editor and anonymous referees for their many helpful comments on an earlier version of our paper. This work was supported in part by the National Natural Science Foundation of China under grant numbers 72171016 and 71661167009 , the NSFC/RGC joint support scheme under grant number 3-RAA7 , and Beijing Logistics Informatics Research Base. Cheng was also supported in part by The Hong Kong Polytechnic University under the Fung Yiu King-Wing Hang Bank Endowed Professorship in Business Administration.
Publisher Copyright:
© 2022 Elsevier Ltd
PY - 2022/12
Y1 - 2022/12
N2 - As a common practice in many industries, outsourcing has two main structures, namely turnkey (contract manufacturers (CMs) purchase components from suppliers directly) and buy-sell (original equipment manufacturers (OEMs) purchase components from suppliers and resell them to CMs). However, outsourcing may result in product quality problems. How to choose an appropriate outsourcing structure considering quality management is an important problem faced by OEMs. In this paper we consider a system comprising one OEM and one CM, and study their equilibrium policies under the turnkey and buy-sell. Then we compare the OEM's profits under the two structures and identify conditions under which one structure outperforms the other one. For the case where the compensation is an exogenous parameter, we show that which structure is optimal depends on the compensation, the external failure cost, the cost differences between the two suppliers and the CM's crafts, and the non-defective rates of the low-type supplier and low-level process craft. When the compensation is higher than the external failure cost, the OEM should choose turnkey. Otherwise, which structure is better depends on the parameters. We then consider the case where the compensation is a decision variable and find that the OEM should choose turnkey. Finally, considering the case where the players have different market powers, we find that turnkey is optimal when the CM is more powerful. When the OEM is more powerful, turnkey is better when the external failure cost is low and the OEM's market power is not too high; otherwise, buy-sell is better.
AB - As a common practice in many industries, outsourcing has two main structures, namely turnkey (contract manufacturers (CMs) purchase components from suppliers directly) and buy-sell (original equipment manufacturers (OEMs) purchase components from suppliers and resell them to CMs). However, outsourcing may result in product quality problems. How to choose an appropriate outsourcing structure considering quality management is an important problem faced by OEMs. In this paper we consider a system comprising one OEM and one CM, and study their equilibrium policies under the turnkey and buy-sell. Then we compare the OEM's profits under the two structures and identify conditions under which one structure outperforms the other one. For the case where the compensation is an exogenous parameter, we show that which structure is optimal depends on the compensation, the external failure cost, the cost differences between the two suppliers and the CM's crafts, and the non-defective rates of the low-type supplier and low-level process craft. When the compensation is higher than the external failure cost, the OEM should choose turnkey. Otherwise, which structure is better depends on the parameters. We then consider the case where the compensation is a decision variable and find that the OEM should choose turnkey. Finally, considering the case where the players have different market powers, we find that turnkey is optimal when the CM is more powerful. When the OEM is more powerful, turnkey is better when the external failure cost is low and the OEM's market power is not too high; otherwise, buy-sell is better.
KW - Game theory
KW - Outsourcing
KW - Quality management
KW - Supply chain
UR - http://www.scopus.com/inward/record.url?scp=85132523109&partnerID=8YFLogxK
U2 - 10.1016/j.omega.2022.102707
DO - 10.1016/j.omega.2022.102707
M3 - Journal article
AN - SCOPUS:85132523109
SN - 0305-0483
VL - 113
JO - Omega (United Kingdom)
JF - Omega (United Kingdom)
M1 - 102707
ER -