Outsourcing structures and information flow in a three-tier supply chain

We consider a three-tier supply chain consisting of an original equipment manufacturer (OEM), a contract manufacturer (CM) and a supplier. We analyze and compare three outsourcing structures that are currently implemented by top-tier OEMs: (1) inhouse consignment, under which the OEM signs independent contracts with the CM and the supplier; (2) turnkey with integration, under which the OEM contracts with an alliance of the CM and the supplier; and (3) turnkey, under which the OEM contracts with the CM, and the CM then subcontracts with the supplier. The OEM is a Stackelberg leader who decides how much of the end product to produce. All parties use take-it-or-leave-it wholesale-price contracts. Both the CM and the supplier have private information about their own production costs. The OEM has prior information about these costs, but this prior information depends on the specific outsourcing structure. Each party's optimal decision is characterized. We then compare each party's profits across the three outsourcing structures and identify which benefits and when.