Strategic partial outsourcing in the presence of single-source components

Yutian Chen () and Ying-Ju Chen ()
Additional contact information
Yutian Chen: California State University
Ying-Ju Chen: The Hong Kong University of Science and Technology

Journal of Economics, 2020, vol. 131, issue 3, No 3, 237-265

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: D41 L11 L13 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00712-020-00708-6 Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:131:y:2020:i:3:d:10.1007_s00712-020-00708-6

DOI: 10.1007/s00712-020-00708-6

Access Statistics for this article

Journal of Economics is currently edited by Giacomo Corneo

More articles in Journal of Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().