2003/82/TM  

A new production technology becomes available, enabling the introduction of new products in various end-markets. The opportunity windows in the end-markets are short in the sense that delaying introduction leads to a loss in expected profits. However, early entry is risky: Initially, the precision of the demand forecasts for the new products is low, and the firms learn about the market over time. The authors consider two scenarios where the investments into the new technology are made by an original equipment manufacturer (OEM) selling to the end-market and by a contract manufacturer (CM) serving M OEMs, respectively. The decision maker chooses the time of entry and the capacity that maximize its expected profit. They compare the profits, time-to-market and expected market size in the two scenarios. They identify time-to-market as a reason for outsourcing production in certain cases. However, contrary to the assertion in popular press, outsourcing does not always guarantee faster time to market.