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Outsource to an OEM or an ODM? Profitability and Sustainability Analysis of a Fashion Supply Chain

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Abstract

Consider a fashion supply chain comprising a supplier, a contract manufacturer and a fashion brand, we examine the fashion brand’s profit performances when the contract manufacturer is either an OEM (having no design capability) or an ODM (having design capability). Regarding OEM, the fashion brand designs the products, outsources the manufacturing function, and has the option of outsourcing procurement function. Regarding ODM, the fashion brand buys unlabeled products from the ODM, which is charge of designing and manufacturing. In this case, buy-back contract is widely adopted so as to share the risk of demand uncertainty between the ODM and the fashion brand. We solve the wholesale pricing problems via sequential/simultaneous optimization, and derive the buy-back price via generalize Nash bargaining. We find that, fashion brand prefers contracting with an ODM when its bargaining power in buy-back negotiation is larger than a threshold, although the fashion brand’s order size under ODM is always larger than that under OEM. Interestingly, we find that the buy-back price is decreasing in the fashion brand’s bargaining power. We further analyze the supply chain sustainability in both ODM and OEM scenarios, finding that the supply chain might achieve both environmental sustainability and economic sustainability in OEM scenario when the fashion brand’s bargaining power in buy-back negotiation is small.

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Acknowledgements

The authors are grateful to the editors and the reviewers for their helpful comments to improve the quality of this paper. Lei Chen is the corresponding author. This work was supported by NSFC (No. 71571194), Chang Jiang Scholars Program (Niu Baozhuang 2017), GDUPS (Niu Baozhuang 2017), ITF Project (No.K-ZM25), and the Grants from the Hong Kong Polytechnic University (No. GUA7Y).

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Authors and Affiliations

  1. School of Business Administration, South China University of Technology, Guangzhou, 510640, China

    Baozhuang Niu, Yaoqi Liu & Lei Chen

  2. Department of Industrial and Systems Engineering, the Hong Kong Polytechnic University, Kowloon, Hong Kong, China

    Ping Ji

Authors
  1. Baozhuang Niu
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Corresponding author

Correspondence to Lei Chen.

Additional information

This is an extended work of the paper titled of Delegation with Buy-back Contract in a Fashion Supply Chain under Demand Uncertainty, which was published in the Proceedings of 14th International Conference on Service Systems and Service Management and recommended for publication in this journal by the program committee of the conference.

Baozhuang Niu, Ph.D, is a full professor in the School of Business Administration, South China University of Technology, Guangzhou, Guangdong, China. His research interests include co-opetition game theoretic models and supply chain analysis. He designed this project’s framework and provided the insight analysis. He has published 30 papers at journals such as MSOM, POM, TRB, EJOR, et al. He is suggested as the Young Scholar of “Chang Jiang Scholars Program” (2017) and the Young Scholar of "Pearl River Scholars Program”(2017). He has received 7 best paper awards.

Yaoqi Liu is a Ph.D student in the School of Business Administration, South China University of Technology, Guangzhou, Guangdong, China. His research interests include co-opetition game theoretic models and global supply chain management. He conducted the incentive analysis for the results and wrote the draft of this paper. He has received best paper award at China Scientist Forum on Emergency Management and Financial Risk 2017.

Lei Chen is a Ph.D candidate in the School of Business Administration, South China University of Technology, Guangzhou, Guangdong, China. His research interests include sustainable supply chain management and game theoretic models on software compatibility. He built the model and carried out the mathematical derivation. He has published 4 papers at SCI/SSCI journals, including TRE, IJCCC and Sustainability. He has received the “Best Student Paper Award” at International Conference on Service Systems and Service Management (ICSSSM, 2017).

Ping Ji, Ph.D, is a full professor in the Hong Kong Polytechnic University, Hong Kong. He obtained his PhD from West Virginia University in 1991. His research interests include optimization, operations management and logistics. He helped polish the insights and edited the draft. He has published more than 100 papers in reputed journals and has served as editorial board members for several journals.

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Niu, B., Liu, Y., Chen, L. et al. Outsource to an OEM or an ODM? Profitability and Sustainability Analysis of a Fashion Supply Chain. J. Syst. Sci. Syst. Eng. 27, 399–416 (2018). https://doi.org/10.1007/s11518-018-5376-6

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  • DOI: https://doi.org/10.1007/s11518-018-5376-6

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