Faculty of Business Administration
Contract Manufacturing or Original Design Manufacturing?
The Role of Consumer Preference Information
Prof. Liming LIU
Dean of Faculty of Business
Lingnan University, Hong Kong
To develop a new product, an original equipment manufacturer (OEM) can choose either an original design manufacturing (ODM) strategy under which both the design and manufacturing processes are outsourced to the supplier, or a contract manufacturing (CM) strategy under which only the manufacturing process is outsourced. The OEM acquires private consumer preference information (CPI) for fitness of design, and decides whether to share it with the supplier. Although crucial to successful product development in many industries, choosing between CM or ODM outsourcing strategy (i.e., whether to also outsource product design) and the effects of CPI have not been examined in the existing literature in a product development context. We show how the trade-off between cost efficiency and the value of CPI predicts the appropriate outsourcing strategy. We find that, in contrast to demand information, CPI creates a preference effect, which enhances product design accuracy and affects market demand; and the OEM may share its private information voluntarily, helping the supply chain members achieve a Pareto improvement. Our findings imply that consumer preference uncertainty under different cost structures plays the key role in determining the outsourcing strategy. The value of CPI is high when consumer preference uncertainty is high, and the OEM should adopt the CM strategy for high-end products that usually face high consumer preference uncertainty. Under the ODM strategy, the OEM should consider sharing CPI with the supplier, a strategy that may help to better realize the value of CPI for both supply chain members.
Date: Monday 8 April, 2019
A Short Biography
LIU Liming is a chair professor in the Faculty of Business, Lingnan University in Hong Kong. Prior to his current position, he was with the Faculty of Business, Hong Kong Polytechnic University from 2006 to 2011, and with the Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology from 1993 to 2006. His research areas include supply chain management, inventory theory, empirical research in OM-Accounting/Finance interface, and queueing systems. He has published in Journal of Applied Probability, Queueing Systems, Management Science, Operations Research, MSOM, POMS, TRB, TRE, IIE Transactions, NRL, and EJOR.
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