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Supplier selection of a critical component when the production process can be improved

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  • Pun, Hubert

Abstract

In this paper, we consider the scenario where an original equipment manufacturer (OEM) has decided to outsource the production of a critical component. There are two potential suppliers: one of them is an independent supplier, while the other is a manufacturer that sells a competing product. The customers are heterogeneous in taste preferences, and the firms have products that are horizontally differentiated. Firms can perform R&D activity to improve the production process of this critical component, resulting in a larger customer value. The OEM needs to decide (1) whether to outsource the production of the component to the independent supplier or to the competitor, and (2) whether the OEM or the supplier should invest in the improvement of the production process of the component. We find that it may be optimal to outsource to the competitor and let the competitor be responsible for improving the production process, even though the competitor has the highest cost. We also find that when it is optimal to outsource the production to the independent supplier, the competitor is worse off if the OEM uses the more costly firm to improve the process.

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  • Pun, Hubert, 2014. "Supplier selection of a critical component when the production process can be improved," International Journal of Production Economics, Elsevier, vol. 154(C), pages 127-135.
    • Handle: RePEc:eee:proeco:v:154:y:2014:i:c:p:127-135
    DOI: 10.1016/j.ijpe.2014.04.020
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    3. Weizhe Yang & Yaozhong Wu & Qinglong Gou & Wen Zhang, 2023. "Co‐opetition strategies in supply chains with strategic customers," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 319-334, January.
    4. Glock, Christoph H. & Grosse, Eric H. & Ries, Jörg M., 2017. "Reprint of “Decision support models for supplier development: Systematic literature review and research agenda”," International Journal of Production Economics, Elsevier, vol. 194(C), pages 246-260.
    5. Hyoung Jun Kim & Su Jung Jee & So Young Sohn, 2021. "Cost–benefit model for multi-generational high-technology products to compare sequential innovation strategy with quality strategy," PLOS ONE, Public Library of Science, vol. 16(4), pages 1-17, April.
    6. Shaojian Qu & Hui Yang & Ying Ji, 2021. "Low-carbon supply chain optimization considering warranty period and carbon emission reduction level under cap-and-trade regulation," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(12), pages 18040-18067, December.
    7. Reimann, Marc & Xiong, Yu & Zhou, Yu, 2019. "Managing a closed-loop supply chain with process innovation for remanufacturing," European Journal of Operational Research, Elsevier, vol. 276(2), pages 510-518.
    8. Guojun Ji & Wen Hong, 2024. "Research on the Manufacturer’s Strategies under Different Supply Interruption Risk Based on Supply Chain Resilience," Sustainability, MDPI, vol. 16(2), pages 1-25, January.
    9. Deng, Sijing & Xu, Jiayan, 2023. "Manufacturing and procurement outsourcing strategies of competing original equipment manufacturers," European Journal of Operational Research, Elsevier, vol. 308(2), pages 884-896.
    10. DeYong, Gregory D. & Pun, Hubert, 2015. "Is dishonesty the best policy? Supplier behaviour in a multi-tier supply chain," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 1-13.
    11. Sim, Jeongeun & Kim, Bosung, 2021. "Sourcing decision in the presence of a complementary component," Omega, Elsevier, vol. 101(C).
    12. Jindai Zhang & Jinlou Zhao, 2022. "Prediction-Driven Sequential Optimization for Refined Oil Production-Sales-Stock Decision-Making," Energies, MDPI, vol. 15(12), pages 1-19, June.
    13. Pun, Hubert & Ghamat, Salar, 2016. "The value of partnership under competition: When competitors may be R&D joint-venture and supply-chain partners for a critical component," International Journal of Production Economics, Elsevier, vol. 177(C), pages 1-11.

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