International Journal of Industrial Engineering & Production Research

In today complex worldwide supply chains, intermediary organizations like Contract manufacturers and GPOs are mostly used. Well-known OEMs delegate their purchasing and procuring to these intermediaries. Because of their positive influence on supply chain efficiency, it is very important to investigate the role of intermediaries in today competitive supply chains. One important question arising about intermediaries is the conditions that the OEM controls his procurement or delegates this task to the intermediary organization?

To answer this question, this paper studies the equilibrium for component procurement strategies of two competing OEMs that produce substitutable products. Each OEM may either directly procure the input from the component supplier, or delegate the procurement task to the contract manufacturer. We analyze the OEMs’ procurement game under two contracting power schemes in such a supply chain: the supplier Stackelberg, where the component supplier acts as the Stackelberg leader, and the OEM Stackelberg, where the OEMs are the first movers.

We show that, the smaller OEM always prefers direct control of component procurement. This is because the OEM will receive a lower component price if the component supplier can price discriminate the OEMs. In contrast, the larger OEM’s preference depends on the contracting power scheme. Under the supplier Stackelberg, the larger OEM never prefers direct procurement; however, under the OEM Stackelberg, the larger OEM may have incentives to use direct procurement under reasonable conditions. This implies that a shift of the market power from the supplier to the OEMs may lead to more OEMs deviating from delegation to direct control.