Stanford weighs in

Staff -- Purchasing, 4/1/2004 2:00:00 AM

Stanford Business School has completed a study that found outsourcing to contract manufacturers may ultimately harm some OEMs (and market development) by reducing incentives to innovate. The study also found pooling manufacturing resources among OEMs is sometimes a better strategy than outsourcing to contract manufacturers, and sophisticated new approaches to negotiating contracts between OEMs and contract manufacturers can significantly improve margins for both parties. "If the bargaining strength of the OEM is sufficiently high, the level of innovation effort [and resulting market size] will increase due to outsourcing," said author Erica L. Plambeck, assistant professor of operations, information, and technology at the Stanford Graduate School of Business. "On the other hand, if the OEM has little bargaining strength, then the OEM—anticipating that much of the value created by his investment innovation will be expropriated by the CM—will invest less in innovation."

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