Fit between sourcing capabilities and organisational structure on IT outsourcing performance

Thus far, relatively few studies on the supplier side of Information Technology (IT) outsourcing arrangements have been based on empirical quantitative research. Previous research identified a recurring supplier problem, a lack of sustainability in IT performance. The literature revealed that a supplier's capabilities and organisational structure affect the supplier performance. We hypothesise that realising a fit between the necessary sourcing capabilities and organisational structure on the IT supplier side will result in a sustainable sourcing performance. We executed a survey research among employees involved in sourcing activities of three different IT outsourcing suppliers (N?=?135). The results from our analysis provide evidence that these constructs can be used to analyse differences between the three types of service suppliers. Results indicate that suppliers who focus on establishing a fit are more willing or able to monitor if they achieve a sustainable performance.     

Production systems and supplier selection: a multi-phase process model

Abstract

Purpose: This paper presents a combined multi-phase supplier selection model. The process repeatedly revisits the criteria and sourcing decision as the development process continues. This enables a structured adoption of product and production system innovation from strategic suppliers, where previously the literature purely focuses on product innovation or cost reduction. Design/methodology/approach: The authors adopted an embedded researcher style, inductive, qualitative case study of an industrial supply cluster comprising a focal automotive company and its interaction with three different strategic stamping suppliers. Findings: Our contribution is the multi-phased production and product innovation process. This is an advance from traditional supplier selection and also an extension of ideas of supplier-located product development as it includes production system development, and complements the literature on working with strategic suppliers. Specifically, we explicitly articulate the previously unreported issue of whether a supplier chosen for its innovation capabilities at the start of the new product development process will also be the most appropriate supplier during the production system development phase, when an ability to work collaboratively may be the most important attribute, or in the large-scale production phase when an ability to manufacture at low unit cost may be most important. Originality/value: The paper identifies a multi-phase approach to tendering within a fixed body of strategic suppliers which seeks to identify the optimum technological and process decisions as well as the traditional supplier sourcing choice. These areas have not been combined before and generate a valuable approach for firms to adopt as well as for researchers to extend our understanding of a highly complex process.     

Sourcing Decisions with Competitive Suppliers and Imperfect Information

Manufacturers often must choose between outsourcing and producing internally. This choice is complex and influenced by a variety of factors, including the costs and capabilities of the potential suppliers. In addition, if the manufacturer outsources, he must design the sourcing process. We study the manufacturer's outsourcing decision, with a focus on the impact of the sourcing process on that decision. We consider a setting in which the manufacturer has imperfect information regarding the suppliers' costs and capabilities, and we assume that the manufacturer uses a two‐stage sourcing process. The first stage is the qualification stage, in which the manufacturer seeks to reduce the uncertainty regarding the suppliers' capabilities. The second stage is the supplier selection stage, in which the manufacturer selects among the qualified suppliers on the basis of price. We first characterize the optimal design of the two‐stage process, and then consider the outsourcing decision. We demonstrate several trade‐offs. Vertical integration enables the manufacturer to reduce uncertainty and extract all of the profits of production. However, outsourcing enables the manufacturer to take advantage of the (potentially) lower costs and higher capabilities of the suppliers, particularly if competition between suppliers can be encouraged. We find that the manufacturer is more likely to vertically integrate when the warranty cost and the cost of exerting effort during qualification are large, and when there is significant uncertainty regarding the suppliers' capabilities. The manufacturer is more likely to outsource when the suppliers' costs (capabilities) are low (high), and when the number of suppliers is large.     

Strategic Outsourcing Decisions for Manufacturers that Produce Partially Substitutable Products in a Quantity‐Setting Duopoly Situation*

This article examines production and outsourcing decisions for two manufacturers that produce partially substitutable products and play a strategic game with quantity competition. When both manufacturers outsource key components to the same upstream supplier, their products become more substitutable due to the increased commonality of the products. In addition, outsourcing may create better consumer perception about the product if the manufacturers choose reputable suppliers with better brand or quality. We explicitly model the substitutability change and the brand/quality effect and provide conditions under which the manufacturers should outsource the components to a supplier. We present the subgame perfect Nash equilibriums for the situation in which there is only one supplier and the case in which two suppliers compete with each other in the upstream supply chain. Numerical examples are presented to illustrate the findings.     

The Role of Contract Negotiation and Industry Structure in Production Outsourcing

Despite the spread of cost‐driven outsourcing practices, academic research cautions that suppliers' cost advantage may weaken manufacturers' bargaining positions in negotiating outsourcing agreements, thereby hurting their profitability. In this study, we attempt to further understand the strategic impact of low‐cost outsourcing on manufacturers' profitability by investigating the contractual form of outsourcing agreements and the industry structure of the upstream supply market. We consider a two‐tier supply chain system, consisting of two competing manufacturers, who have the option to produce in‐house or to outsource to an upstream supplier with lower cost. To reach an outsourcing agreement, each manufacturer engages in bilateral negotiation with her supplier, who may be an exclusive supplier or a common supplier serving both manufacturers. Our analysis shows that wholesale‐price contracts always mitigate the competition between manufacturers regardless of whether they compete with price or quantity. In contrast, two‐part tariffs intensify the competition when the manufacturers compete with quantity, but soften it when they compete with price. As a result, when outsourcing with two‐part tariffs, the manufacturers may earn lower profits than they would from in‐house production, although the suppliers are more cost efficient. This suggests that managers have to be wary about the downside of using coordinating contracts such as two‐part tariffs when pursuing low‐cost outsourcing strategies. Our analysis also sheds some light on the profitability of using an exclusive supplier for outsourcing. When outsourcing with wholesale‐price contracts, the competing manufacturers are better off outsourcing to an exclusive supplier. However, when outsourcing with two‐part tariffs, the manufacturers may earn higher profits by outsourcing to a common supplier than to an exclusive one when the manufacturers' bargaining power is sufficiently strong (weak) under quantity (price) competition.     

The effect of supplier development on outsourcing performance: the mediating roles of opportunism and flexibility

Abstract

In this increasingly competitive business environment, firms utilise outsourcing as a strategic tool to leverage globally dispersed resources so that they may focus on their core competencies and improve efficiency. The more firms rely on outsourcing, the more they depend on their suppliers, and the more important it is to manage and develop suppliers in order to achieve and maximise the benefits of outsourcing. This paper explores the impact of supplier development on outsourcing performance. Structural equation modelling was used to analyse data collected from 213 manufacturing firms in China. The results indicate that supplier development has a strong direct positive impact on outsourcing performance, and that supplier development also leads to enhanced outsourcing performance through reducing outsourcing opportunism risk and improving outsourcing flexibility. In addition to making a contribution to current theories of outsourcing, our findings also provide outsourcing managers with practical understanding and insights about the role of supplier development in enhancing outsourcing performance.     

Supplier competition and its impact on firm׳s sourcing strategy

Most research on firms׳ sourcing strategies assumes that wholesale prices and reliability of suppliers are exogenous. It is of our interest to study suppliers׳ competition on both wholesale price and reliability and firms׳ corresponding optimal sourcing strategy under complete information. In particular, we study a problem in which a firm procures a single product from two suppliers, taking into account suppliers׳ price and reliability differences. This motivates the suppliers to compete on these two factors. We investigate the equilibria of this supplier game and the firm׳s corresponding sourcing decisions. Our study shows that suppliers׳ reliability often plays a more important role than wholesale price in supplier competition and that maintaining high reliability and a high wholesale price is the ideal strategy for suppliers if multiple options exist. The conventional wisdom implies that low supply reliability and high demand uncertainty motivate dual-sourcing. We notice that when the suppliers׳ shared market/transportation network is often disrupted and demand uncertainty is high, suppliers׳ competition on both price and reliability may render the sole-sourcing strategy to be optimal in some cases that depend on the format of suppliers׳ cost functions. Moreover, numerical study shows that when the cost or vulnerability (to market disruptions) of one supplier increases, its profit and that of the firm may not necessarily decrease under supplier competition.     

Price and Service Competition in an Outsourced Supply Chain

We consider a buyer who outsources the manufacturing of a product to multiple symmetric make‐to‐stock suppliers who compete on price and service (fill rate). The buyer allocates demand to the suppliers using a score function with an exponential form, which specifies the relative importance of price vs. service, in order to minimize his costs, while the suppliers choose their prices and fill rates to maximize their profits. For the case of dual‐sourcing, we characterize the optimal parameter of the exponential score function, considering the impact of the buyer's decisions on the suppliers, and considering how the suppliers compete against each other to earn a portion of the buyer's demand. We prove the existence of a unique equilibrium and characterize the equilibrium behavior of the system. We then consider a general number of suppliers and show that the equilibrium prices and fill rates, and the buyer's cost, are increasing in the number of suppliers. We compare these results to a model of single‐sourcing, in which the buyer is the Stackelberg leader and extracts all profits from the supplier. We find that the buyer always prefers single‐sourcing to multisourcing. Finally, we study a centralized system and use the results to develop a coordinating contract for the decentralized system.     

Failure Risk and Quality Cost Management in Single versus Multiple Sourcing Decision

The advantage of multiple sourcing to protect against supplier failures arising from undependable products due to latent defects is examined using a model with nonlinear external failure costs. Prior research has focused only on supplier failures arising from unreliable supply, such as late, insufficient, or no delivery. I derive a closed‐form characterization of the optimal production quota allocation for the LUX (Latent defect‐Undependable product‐eXternal failure) setting. The allocation determines the optimal supply base, with intuitive properties that hold under a mild requirement. The requirement includes the special case of equal procurement costs charged by suppliers but also allows unequal costs without any particular order. The key result of the article is a necessary and sufficient condition determining whether single or multiple sourcing is optimal. Another condition is obtained to determine the exact size of the optimal supply base, provided the mild requirement holds. With minor modifications, the results also hold when a buyer‐initiated procurement contract can be used to elicit private information on the suppliers’ unit variable production costs.     

Early supplier involvement in the design process: lessons from the electronics industry

The movement of activities earlier in the product development process, necessitates a re-examination of the total supply network. Supply chain literature has traditionally examined procurement and value-adding activities, without explicitly defining product development as part of these. The trend towards outsourcing design activities is bringing recognition for this process as part of the total supply network. The objective of this paper is to determine the degree of early supplier involvement (ESI) that exists between a multinational electronics company and its key suppliers, in terms of depth of integration, information exchange and buyer–supplier relationships. The paper provides insights into the strategic factors that affect the dynamics of the ESI process. Such insights are valuable in terms of gaining a greater understanding of how the ESI process is managed and determining the barriers to effective supplier integration. The research indicates that there are considerable impediments for those participants responsible for establishing and managing the implementation of ESI. A number of strategic insights are identified that explain the existence of the impediments to the ESI process. Finally, based upon the findings a number of lessons are highlighted for organisations considering the adoption of the ESI process.     

Joint supplier selection and scheduling of customer orders under disruption risks: Single vs. dual sourcing

This paper presents a stochastic mixed integer programming approach to integrated supplier selection and customer order scheduling in the presence of supply chain disruption risks, for a single or dual sourcing strategy. The suppliers are assumed to be located in two different geographical regions: in the producer's region (domestic suppliers) and outside the producer's region (foreign suppliers). The supplies are subject to independent random local disruptions that are uniquely associated with a particular supplier and to random semi-global (regional) disruptions that may result in disruption of all suppliers in the same geographical region simultaneously. The domestic suppliers are relatively reliable but more expensive, while the foreign suppliers offer competitive prices, however material flows from these suppliers are more exposed to unexpected disruptions. Given a set of customer orders for products, the decision maker needs to decide which single supplier or which two different suppliers, one from each region, to select for purchasing parts required to complete the customer orders and how to schedule the orders over the planning horizon, to mitigate the impact of disruption risks. The problem objective is either to minimize total cost or to maximize customer service level. The obtained combinatorial stochastic optimization problem will be formulated as a mixed integer program with conditional value-at-risk as a risk measure. The risk-neutral and risk-averse solutions that optimize, respectively average and worst-case performance of a supply chain are compared for a single and dual sourcing strategy and for the two different objective functions. Numerical examples and computational results are presented and some managerial insights on the choice between the two sourcing strategies are reported.     

Managing Disruptions in Decentralized Supply Chains with Endogenous Supply Process Reliability

Supply disruptions are all too common in supply chains. To mitigate delivery risk, buyers may either source from multiple suppliers or offer incentives to their preferred supplier to improve its process reliability. These incentives can be either direct (investment subsidy) or indirect (inflated order quantity). In this study, we present a series of models to highlight buyers’ and suppliers’ optimal parameter choices. Our base‐case model has deterministic buyer demand and two possibilities for the supplier yield outcomes: all‐or‐nothing supply or partial disruption. For the all‐or‐nothing model, we show that the buyer prefers to only use the subsidy option, which obviates the need to inflate order quantity. However, in the partial disruption model, both incentives—subsidy and order inflation—may be used at the same time. Although single sourcing provides greater indirect incentive to the selected supplier because that avoids order splitting, we show that the buyer may prefer the diversification strategy under certain circumstances. We also quantify the amount by which the wholesale price needs to be discounted (if at all) to ensure that dual sourcing strategy dominates sole sourcing. Finally, we extend the model to the case of stochastic demand. Structural properties of ordering/subsidy decisions are derived for the all‐or‐nothing model, and in contrast to the deterministic demand case, we establish that the buyer may increase use of subsidy and order quantity at the same time.     

Sourcing Decisions with Stochastic Supplier Reliability and Stochastic Demand

Supplier sourcing strategies are a crucial factor driving supply chain success. In this paper, we investigate the implications of uncertain supplier reliability on a firm's sourcing decisions in an environment with stochastic demand. In particular, we characterize specific conditions under which a firm should choose a single versus multiple supplier sourcing strategy. In an environment with both uncertain demand and supply, we characterize the total order quantity, the number of suppliers selected for order placement, and the allocation of the total order quantity among these selected suppliers. For deeper managerial insight, we also examine the sensitivity of the optimal sourcing decisions to interactions between uncertainties in product demand and supply reliability. We show that sourcing from a single supplier is an optimal strategy for environments characterized by high levels of demand uncertainty or high salvage values. A numerical analysis based on data obtained from an office products retailer further reinforces our analytical results. In addition, we also find that when minimal order quantities are imposed, there are situations where it is not optimal to place an order with the lowest cost supplier.     

Impact of competitive conditions on supplier evaluation: a construction supply chain case study

This research proposes a multi-criteria decision-making (MCDM) framework and demonstrates the impact of competitive conditions on supplier evaluation process for construction supply chains. The paper focuses on the supply chain of a large-scale housing project in order to illustrate the role of competitive capability and suppliers’ profile and its influence on supplier evaluation based on prevailing supply/market conditions. Various scenarios are investigated to demonstrate the impact of competition on supplier evaluation. The contribution of the study lies in highlighting the impact of supply/market conditions on MCDM decisions causing supplier evaluation ‘imbalance’ and MCDM usage. It is expected that the study will be useful for project management, construction, supply chain management, sourcing professionals. The findings of the study are generalisable to projects-based situations such as petroleum refinery and ship building where bill of materials typically consists of thousands of items and a large number of suppliers are involved.     

A Multi‐Supplier Sourcing Problem with a Preference Ordering of Suppliers

We study a sourcing problem faced by a firm that seeks to procure a product or a component from a pool of alternative suppliers. The firm has a preference ordering of the suppliers based on factors such as their past performance, quality, service, geographical location, and financial strength, which are commonly included in a supplier scorecard system. Thus, the firm first uses available inventory from supplier 1, if any, then supplier 2, if any, and so on. The suppliers differ in costs and prices. The buyer firm seeks to determine which suppliers to purchase from and in what quantities to maximize its total expected profit subject to the preference ordering constraint. We present the optimal solution to this problem, and show that it has a portfolio structure. It consists of a sub‐set of suppliers that are ordered by their underage and overage costs. This portfolio achieves a substantial profit gain compared to sourcing from a unique supplier. We present an efficient algorithm to compute the optimal solution. Our model applies to component sourcing problems in manufacturing, merchandizing problems in retailing, and capacity reservation problems in services.     

Do service-oriented IT architectures facilitate business process outsourcing?

How does a firm’s IT architecture affect its potential to outsource business processes? As Information Technology (IT) has become many firms’ essential operational infrastructure or “backbone”, we are interested in scrutinizing to what extent the kind of IT architecture affects a firm’s boundaries or the plasticity of its boundaries. Focusing on the particular concept of service-oriented architectures (SOA), we concretely ask: How does SOA affect business process outsourcing potentials? Since SOA is widely expected to modularize the IT implementation of business processes, it should increase business process outsourcing (BPO) in terms of buying in the provision of single business functionalities. We develop and empirically evaluate a theoretical model that conceptualizes the relationship between SOA and BPO. Questionnaire data from 115 firms give first evidence that SOA facilitates BPO. By increasing IT modularity, SOA supports BPO by increasing sourcing flexibility and, in particular, operational benefits, while at the same time lowering financial risks and strategic risks, such as lock-in. Overall, however, firms see SOA-based BPO mainly in an operational context with low hidden costs and little strategic benefits.     

Search for Alternatives and Collaboration with Incumbents: Two-Sided Sourcing Behavior in Business Markets*

Sourcing strategies in business markets have been considered separately and the practice of two-sided sourcing behavior—engaging in search for alternative suppliers and collaboration with an incumbent supplier—has not been examined. To fill that gap, we first identify boundary conditions under which the poor performance of an incumbent supplier intensifies an original equipment manufacturer's (OEM) search and collaboration. Then, we examine how an OEM's two-sided sourcing behavior influences one of the critical elements of sourcing performance: the responsiveness of the incumbent supplier. Our proposed hypotheses were tested with data from a national survey of 539 OEM purchasing managers in the Japanese electronics industry. The analysis results indicate three main findings. First, two environmental conditions—pace of technological change and volume uncertainty—have contrasting influences on the link between incumbent supplier performance and an OEM's search and collaboration. While uncertainty from the upstream channel (pace of technological change) enhances an OEM's search and collaboration, uncertainty from the downstream channel (volume uncertainty) lowers an OEM's search and collaboration. Second, an OEM's dependence on its incumbent supplier has differential effects: an OEM reduces search as its dependence on incumbent supplier increases, while it enhances collaboration as its dependence on incumbent supplier increases. Third, while search alone has a negative effect on responsiveness of an incumbent supplier, engaging in two-sided sourcing behavior (i.e., combining search with collaboration) has a positive effect on responsiveness of the incumbent supplier.     

多部件采购外包的两阶段均衡投标策略

本文考虑一个由单个制造商和多个供应商群体组成的供应链——该制造商需要采购多个部件,对于每个部件在市场上均存在多个供应商。不同于传统的从各供应商群体分别采购各个部件,制造商考虑将所有部件的采购整体外包给某个供应商。在第一阶段,制造商使用一级价格密封投标的逆向拍卖来确定赢得整体采购合约的供应商。接下来,第一阶段投标的获胜者生产其所能供应的部件,并使用逆向拍卖向第一阶段中未获胜的其他竞标者采购其余部件。我们分析了供应商在两个阶段的均衡竞价策略,并比较了制造商在亲自逐件采购和外包整体采购两种情况下的期望采购成本。我们证明了在两种机制下制造商的总的期望采购成本相等。     

Dynamic Supply Risk Management with Signal‐Based Forecast,Multi‐Sourcing,and Discretionary Selling

We examine the critical role of advance supply signals—such as suppliers’ financial health and production viability—in dynamic supply risk management. The firm operates an inventory system with multiple demand classes and multiple suppliers. The sales are discretionary and the suppliers are susceptible to both systematic and operational risks. We develop a hierarchical Markov model that captures the essential features of advance supply signals, and integrate it with procurement and selling decisions. We characterize the optimal procurement and selling policy, and the strategic relationship between signal‐based forecast, multi‐sourcing, and discretionary selling. We show that higher demand heterogeneity may reduce the value of discretionary selling, and that the mean value‐based forecast may outperform the stationary distribution‐based forecast. This work advances our understanding on when and how to use advance supply signals in dynamic risk management. Future supply risk erodes profitability but enhances the marginal value of current inventory. A signal of future supply shortage raises both base stock and demand rationing levels, thereby boosting the current production and tightening the current sales. Signal‐based dynamic forecast effectively guides the firm's procurement and selling decisions. Its value critically depends on supply volatility and scarcity. Ignoring advance supply signals can result in misleading recommendations and severe losses. Signal‐based dynamic supply forecast should be used when: (a) supply uncertainty is substantial, (b) supply‐demand ratio is moderate, (c) forecast precision is high, and (d) supplier heterogeneity is high.     

存在信息更新时的双源采购和后备生产结合策略研究

在现实的采购运作中,双源采购和后备生产是两种最常见的风险应对策略。本文在考虑信息更新的情况下,探讨了一个两阶段动态采购决策模型：第一阶段,制造商向存在供应风险的一个或两个主供应商订货;第二阶段,制造商根据主供应商风险信息的更新,决定是否向供应可靠但价格较高的后备供应商订货。本文得到了两阶段的最优采购策略,分析发现,当固定采购成本较低时：若潜在市场需求较小,双源采购将排斥后备生产;若潜在市场需求较大,双源采购和后备生产共存;若潜在市场需求适中,后备生产可能排斥双源采购,两者也可能共存。特别地,在潜在市场需求适中时,可靠性改进概率的增大或后备供应商生产成本的降低,将使后备生产趋于排斥双源采购;反之,可靠性改进概率的减小、固定采购成本的降低或后备生产成本的增加,将使两者趋于共存。