Will Supplier’s Quality Improvement Discourage Competing Buyers’ Joint Procurement? Impact of Product Diversification and Manufacturing Cooperation

Abstract

Consider a brand that competes with its contract manufacturer (CM) when the CM has a self-brand business. Their products need the same key components (e.g., Dell and ASUS both use Intel Core processor for their laptops) but eventually have differentiated performances because the competitive CM usually have inferior product design capability. One natural question is whether it is beneficial to pool their component purchase orders for cost saving and if so, whether the component supplier’s incentive to improve quality will be discouraged. We build a co-opetitive three-layer supply chain model to find the answers by formulating the trade-offs among the component supplier’s quality investment, the brand and the competitive CM’s manufacturing cooperation, and their product competition in the downstream market. We find that when the CM’s design capability disadvantage is either limited or significant, leading to intensified or mild product competition, component quality investment will be encouraged, but the joint procurement between the brand and the competitive CM will be discouraged. Recognizing the brand’s advantageous demand potential, the supplier will strategically adjust the CM’s wholesale price upward, whereas the brand’s downward without the joint procurement of the brand and the competitive CM. This creates an all-win situation for the stakeholders in a co-opetitive supply chain system.

Keywords: Joint procurement; Quality improvement; Pricing strategy; Channel competition; Co-opetitive supply chain.