Strategic outsourcing in a supply chain

Nowadays outsourcing is a prevailing trend in industry, which allows brand name companies to wholly concentrate on their core competences, as well as introducing some risks when outsourcing its production and procurement activities. In this thesis, we study two issues on outsourcing management with information asymmetries. We begin with the procurement outsourcing decisions. A brand name company may outsource the procurement activities along with production to a contract manufacturer in pursuit of a low cost, while such an approach may incur uncertainty on the quality of the materials and the final products. We consider a supply chain consisting of one brand name company, one contract manufacturer and a pool of material suppliers with distinct quality levels. The prices obtained from the suppliers depend on the bargaining power of the buyer, which is private information. We derive the optimal contracts under various scenarios to address whether the brand name company should outsource the procurement function and evaluate the value of procurement outsourcing strategy in offsetting supply chain risks. We also propose a quality management scheme as a means of fraud prevention in procurement outsourcing. In the second problem, we study dynamic outsourcing mechanism design. We examine a multi-period game in which a brand name company outsources the production to a contract manufacturer. The unit production cost in each period consists of two parts: a random shock that is only observed by the contract manufacturer, and a deterministic cost representing the learning effect, which decreases in the accumulated production volume. Our analysis reveals that the order quantity in each period is not only determined by the cost in the current period, but also by the past orders. Thus we derive the optimal quantity-based contracts in each period, and compare the decisions in different scenarios and analyzed the impact of the learning rate in dynamic mechanism design.