The interaction of CM’s encroachment time and OEM’s outsourcing strategy when considering the cost-learning effect

Lei Xie, Chi Zhang, Pengwen Hou and Shuhua Zhang

Journal of the Operational Research Society, 2025, vol. 76, issue 4, 758-771

Abstract: Contract manufacturing has been widely studied in recent years. At the same time, existing research rarely considers when should the contract manufacturer (CM, she) launch a product of her own brand to encroach into the market. To fill this research gap, this study considers a two-period game consisting of one original equipment manufacturer (OEM, he) and one CM. The CM with a cost-learning ability could strategically decide whether and when to produce a final product of her own to encroach the market. The results show that when the OEM has a strong brand advantage, the CM may lose profit from encroachment into the market because her cost-learning capability contributes to grabbing the OEM’s market share and then the decrease in OEM’s orders hurts the CM herself in turn. On the contrary, facing a weak-brand-advantage OEM, the CM will encroach in both periods. Furthermore, the OEM can also derive advantages from the CM’s encroachment when the OEM possesses a strong brand advantage. However, when the OEM’s brand advantage is at a moderate level, refraining from encroachment will result in Pareto Optimality for both the OEM and CM.

Date: 2025
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DOI: 10.1080/01605682.2024.2392780

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