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Strategic partial outsourcing in the presence of single-source components

Author

Listed:
  • Yutian Chen

    (California State University)

  • Ying-Ju Chen

    (The Hong Kong University of Science and Technology)

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.

Suggested Citation

  • Yutian Chen & Ying-Ju Chen, 2020. "Strategic partial outsourcing in the presence of single-source components," Journal of Economics, Springer, vol. 131(3), pages 237-265, December.
    • Handle: RePEc:kap:jeczfn:v:131:y:2020:i:3:d:10.1007_s00712-020-00708-6
    DOI: 10.1007/s00712-020-00708-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Outsourcing; Capacity; Supply chain;
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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