Contract manufacturer’s encroachment strategy and quality decision with different channel leadership structures

Abstract This paper considers a supply chain consisting of a contract manufacturer and an original equipment manufacturer (OEM). The contract manufacturer produces product according to the requirement of the OEM. The contract manufacturer has two encroachment strategies to choose from: building a private brand (PB) or not building a private brand (NPB). If the contract manufacturer chooses strategy PB, she decides the quality level and selling price of the private brand. This paper studies the contract manufacturer’s encroachment strategy and its impact on the OEM under OEM-Stackelberg setting (OS) and contract manufacturer-Stackelberg setting (CS), respectively. Analytic results are derived. When the quality investment cost factor is sufficiently low, the contract manufacturer will never encroach. However, when the quality investment cost factor is sufficiently high, the conditions under which the contract manufacturer will encroach are obtained. Numerical example shows that sometimes the encroachment of the contract manufacturer will harm the benefit of the OEM. Then the effect of channel leadership is studied. Numerical examples show that (i) The channel leadership does not impact the preference of both contract manufacturer and the OEM for the private brand. However, it can reverse the effect of the encroachment strategy on the wholesale price. (ii) The quality of the private brand in model CS is lower than that in the model OS. In model OS, the contract manufacturer has a pressure to provide higher quality for the private brand.