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This article examines strategic outsourcing decisions for two competing manufacturers whose key components have quality improvement (QI) opportunities. We consider the effects of vertical and horizontal product differentiation on demand. In deriving the Subgame Perfect Nash Equilibria (SPNE), it is shown that either a symmetric outsourcing strategy (i.e., both manufacturers outsource) or an asymmetric sourcing strategy profile (i.e., manufacturers use different sourcing strategies) can be an SPNE. Insights are provided into how sourcing strategies are affected by the factors such as fixed setup cost, unit production cost, QI efficiency, and horizontal and vertical differentiations. It is found that larger horizontal differentiation expands the range over which symmetric outsourcing is an equilibrium. In addition, the outsourcing manufacturer may provide a higher QI level, produce a higher quantity, and offer a lower retail price than the insourcing one in the asymmetric sourcing setting. On the other hand...

This article studies two contract mechanisms to share demand and supply risk in a decentralized supply chain. In an option contract, the buyer reserves capacity with a supplier who guarantees delivery up to this limit. This insulates the buyer from any disruption risk, but the supplier faces both demand and supply risk. The second mechanism, the firm order contract, represents a conventional dyadic channel relationship where the buyer places a firm order and the supplier builds capacity but does not guarantee delivery if any disruption occurs. It is shown that the buyer's preference for using the different risk-sharing mechanisms switches back and forth (as the probability of disruption increases). Consequently, a supplier with a higher disruption risk may make higher expected profits compared to one with lower risk. In addition, the buyer may benefit from a higher wholesale price since it provides incentive for the supplier to participate without requiring the buyer to use higher order quantities. Two op...

This paper explores production and outsourcing decisions for two Original Equipment Manufacturers (OEMs) who produce partially substitutable products and have opportunities to invest in reducing the manufacturing cost. In such an environment, competition drives both OEMs to set lower prices and invest more than would maximize their combined profits, particularly when product substitutability is high. However, outsourcing provides a mechanism by which the two OEMs can credibly signal that they will not overinvest in cost reduction, mitigating a mutually destructive cost competition. Our paper explores the role that an external supplier(s) can play in dampening competition between the OEMs when there are opportunities to invest in cost reduction. In particular, we characterize the conditions under which a supplier can profitably enter the market by inducing the OEMs to outsource production. We first examine a basic model of two identical OEMs in which there is a single common supplier and a single component...

This paper presents a general disruption management approach for a two-stage production and inventory control system. A penalty cost for deviations of the new plan from the original plan is incorporated and the concept of a disruption recovery time window is introduced. We define two classes of problems: one with fixed setup epochs and another with flexible setup epochs. With linear or quadratic penalty functions for production/ordering quantity change and fixed setup epochs, the best recovery plan is obtained by solving a quadratic mathematical programming problem. With convex penalty functions for quantity changes and flexible setup epochs, it is shown that the second stage orders have identical order quantities within each production cycle. Therefore, in a lot-for-lot system, the ordering and production quantities for both stages are the same. As a special case, we consider disruption recovery problems with short time windows spanning one or two production cycles. We also discuss solution procedures fo...