Will supplier’s quality improvement discourage competing buyers’ joint procurement? Impact of product differentiation and manufacturing cooperation

Abstract

Consider a brand that competes with its contract manufacturer (CM) where the CM has 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 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. Our study extends prior research on joint procurement by demonstrating how upstream suppliers can leverage both quality investment and wholesale pricing strategies to avoid potential profit loss from buyer procurement alliances.

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