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Yaqin Sun, PhD Candidate at Drexel University

Yaqin Sun, PhD Candidate at Drexel University


Gerri C. LeBow Hall
3220 Market Street
Rm. 209
Philadelphia, PA 19104
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Title: Can learning-by-doing hurt profit? The case of outsourcing and contract manufacturer encroachment

Abstract: Many original equipment manufacturers (OEMs) today reduce their manufacturing costs by
outsourcing their manufacturing functions to contract manufacturers (CMs). Outsourcing,
however, carries significant risks, such as reduction in manufacturing quality and CM
encroachment in the OEM’s end market. To reduce these risks, OEMs face critical decisions
about which CMs to use, and how much product to outsource. CMs also face subsequent
decisions about whether to develop and sell a similar self-branded product. An important
consideration in both OEM and CM decision-making is the so-called learning-by-doing effect.
The learning-by-doing effect refers to the later decrease in unit production cost that arises from
increasing production quantity. As the CM builds more product, it learns to make the product
more efficiently, and thereby lower its future production costs. The CM’s learning rate is the
magnitude of the CM’s subsequent decrease in unit production cost per unit increase in initial
production quantity. In most circumstances, CM profits are enhanced by having a higher
learning rate. Interestingly, however, when a CM decides to encroach in the second period,
there exist particular market conditions wherein a higher learning rate hurts CM profits. We
describe these conditions in detail below. Notably, whether the wholesale price is exogeneous
or endogenous, and the specific magnitude of the wholesale price relative to market size and
production costs, play important roles in the relation between learning rate and CM profits. Our
findings suggest it is prudent for CMs to consider market conditions for their future selfbranded
product prior to making investments to enhance their learning rate.

Speakers

Who should attend?

Audience

  • Faculty
  • PhD
  • Students
    • Current Students

Disciplines

  • Decision Sciences and MIS

This event is part of the Decision Sciences Seminar Series series.