Strategic partial outsourcing in the presence of single-source components
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Strategic partial outsourcing in the presence of singlesource components Yutian Chen1
•
Ying-Ju Chen2
Received: 11 February 2019 / Accepted: 24 June 2020 Springer-Verlag GmbH Austria, part of Springer Nature 2020
Abstract We study the sourcing decision of a manufacturer in choosing between sole sourcing and multi-sourcing for a production component, when available sources are under different efficiency levels. In our model, the manufacturer can either produce the component in-house, or outsource to less efficient external suppliers. Without any demand uncertainty or ex-ante capacity constraint with in-house production, we find that the manufacturer may establish only limited in-house production capacity and eventually outsource to less efficient external suppliers. Such partial outsourcing is purely strategic and is due to the existence of single-source components, with which the manufacturer solely relies on key suppliers who possess great market power. Partial outsourcing enables the manufacturer to mitigate the pricing power of key suppliers, which is optimal to the manufacturer so long as the associated efficiency loss of outsourcing is not too pronounced. Moreover, cost increase in outsourcing may lead the manufacturer to outsource even more in order to boost its profitability. Keywords Outsourcing Capacity Supply chain
JEL Classification D41 L11 L13
& Yutian Chen [email protected] Ying-Ju Chen [email protected] 1
Department of Economics, California State University, Long Beach 90840, CA, USA
2
School of Business and Management and School of Engineering, The Hong Kong University of Science and Technology, Sai Kung, Hong Kong
123
Y. Chen, Y.-J. Chen
1 Introduction Configuration of the supply of indispensable production components is always crucial to manufacturers. Nowadays, it is witnessed many complex sourcing decisions involving multiple suppliers. For example, as a cell phone manufacturer, Samsung uses Google for its platforms and services, and also partnered with Nokia to develop its maps and location services for Galaxy smartphones.1 In many situations, such multisourcing strategy involves an intermingle of internal and external sources in the supply chain. For example, Ford Motor Co. uses Mexican suppliers and also its own facility in Ohio and Michigan for work on the F-650 and F-750 truck models, the Fusion midsize model and its EcoBoost engine.2 Apple continues with some manufacturing outsourced to Asian suppliers, but it also has its manufacturing on the United States including manufacturing its new Mac Pros in a Texas plant and an AppleCare repairs facility in Pennsylvania.3 In the recent years, while continuing with outsourcing, General Electric revived its principal U.S. appliance manufacturing facility in Kentucky, and opened in U.S. assembly lines to make low-energy water heaters.4 Various rationales could underlie such multi-sourcing strategy, as have been reported by media and studied in literature. For example, in the presence o
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