IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v219y2012i2p272-283.html
   My bibliography  Save this article

Impact of sourcing flexibility on the outsourcing of services under demand uncertainty

Author

Listed:
  • Benaroch, Michel
  • Webster, Scott
  • Kazaz, Burak

Abstract

This paper investigates the relationship between market conditions and the value and use of sourcing flexibility for service processes. We develop and analyze a series of models, and we derive expressions for the optimal switching decision, the value of the option to outsource, the value of the option to backsource, and the probability and timing of switches between the alternative sources.

Suggested Citation

  • Benaroch, Michel & Webster, Scott & Kazaz, Burak, 2012. "Impact of sourcing flexibility on the outsourcing of services under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 219(2), pages 272-283.
  • Handle: RePEc:eee:ejores:v:219:y:2012:i:2:p:272-283
    DOI: 10.1016/j.ejor.2011.12.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221711010848
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ejor.2011.12.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Osei-Bryson, Kweku-Muata & Ngwenyama, Ojelanki K., 2006. "Managing risks in information systems outsourcing: An approach to analyzing outsourcing risks and structuring incentive contracts," European Journal of Operational Research, Elsevier, vol. 174(1), pages 245-264, October.
    2. Oz Shy & Rune Stenbacka, 2005. "Partial outsourcing, monitoring cost, and market structure," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1173-1190, November.
    3. Joseph M. Milner & Tava Lennon Olsen, 2008. "Service-Level Agreements in Call Centers: Perils and Prescriptions," Management Science, INFORMS, vol. 54(2), pages 238-252, February.
    4. Amrit Tiwana & Mark Keil, 2007. "Does peripheral knowledge complement control? An empirical test in technology outsourcing alliances," Strategic Management Journal, Wiley Blackwell, vol. 28(6), pages 623-634, June.
    5. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    6. Jason Amaral & Corey A. Billington & Andy A. Tsay, 2006. "Safeguarding the Promise of Production Outsourcing," Interfaces, INFORMS, vol. 36(3), pages 220-233, June.
    7. O. Zeynep Akc{s}in & Francis de Véricourt & Fikri Karaesmen, 2008. "Call Center Outsourcing Contract Analysis and Choice," Management Science, INFORMS, vol. 54(2), pages 354-368, February.
    8. Burak Kazaz & Maqbool Dada & Herbert Moskowitz, 2005. "Global Production Planning Under Exchange-Rate Uncertainty," Management Science, INFORMS, vol. 51(7), pages 1101-1119, July.
    9. Panos Kouvelis & Kostas Axarloglou & Vikas Sinha, 2001. "Exchange Rates and the Choice of Ownership Structure of Production Facilities," Management Science, INFORMS, vol. 47(8), pages 1063-1080, August.
    10. Pendharkar, Parag C., 2010. "Valuing interdependent multi-stage IT investments: A real options approach," European Journal of Operational Research, Elsevier, vol. 201(3), pages 847-859, March.
    11. Z. Justin Ren & Yong-Pin Zhou, 2008. "Call Center Outsourcing: Coordinating Staffing Level and Service Quality," Management Science, INFORMS, vol. 54(2), pages 369-383, February.
    12. Alvarez, Luis H.R. & Stenbacka, Rune, 2007. "Partial outsourcing: A real options perspective," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 91-102, February.
    13. Li, Shanling & Wang, Letian, 2010. "Outsourcing and capacity planning in an uncertain global environment," European Journal of Operational Research, Elsevier, vol. 207(1), pages 131-141, November.
    14. Lauren Xiaoyuan Lu & Jan A. Van Mieghem, 2009. "Multimarket Facility Network Design with Offshoring Applications," Manufacturing & Service Operations Management, INFORMS, vol. 11(1), pages 90-108, October.
    15. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 205-228.
    16. Lowe, Timothy J. & Wendell, Richard E. & Hu, Gang, 2002. "Screening location strategies to reduce exchange rate risk," European Journal of Operational Research, Elsevier, vol. 136(3), pages 573-590, February.
    17. Sameer Hasija & Edieal J. Pinker & Robert A. Shumsky, 2008. "Call Center Outsourcing Contracts Under Information Asymmetry," Management Science, INFORMS, vol. 54(4), pages 793-807, April.
    18. Hutzschenreuter, Thomas & Lewin, Arie Y. & Ressler, Wolfgang, 2011. "The growth of white-collar offshoring: Germany and the US from 1980 to 2006," European Management Journal, Elsevier, vol. 29(4), pages 245-259, August.
    19. Mustafa Akan & Bar{i}c{s} Ata & Martin A. Lariviere, 2011. "Asymmetric Information and Economies of Scale in Service Contracting," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 58-72, September.
    20. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    21. Qing Ding & Lingxiu Dong & Panos Kouvelis, 2007. "On the Integration of Production and Financial Hedging Decisions in Global Markets," Operations Research, INFORMS, vol. 55(3), pages 470-489, June.
    22. Sriram Dasu & Lode Li, 1997. "Optimal Operating Policies in the Presence of Exchange Rate Variability," Management Science, INFORMS, vol. 43(5), pages 705-722, May.
    23. Jan A. Van Mieghem, 2003. "Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 269-302, July.
    24. Jan A. Van Mieghem & Nils Rudi, 2002. "Newsvendor Networks: Inventory Management and Capacity Investment with Discretionary Activities," Manufacturing & Service Operations Management, INFORMS, vol. 4(4), pages 313-335, August.
    25. Akira Takeishi, 2001. "Bridging inter‐ and intra‐firm boundaries: management of supplier involvement in automobile product development," Strategic Management Journal, Wiley Blackwell, vol. 22(5), pages 403-433, May.
    26. Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
    27. Li, Shanling & Murat, Alper & Huang, Wanzhen, 2009. "Selection of contract suppliers under price and demand uncertainty in a dynamic market," European Journal of Operational Research, Elsevier, vol. 198(3), pages 830-847, November.
    28. Jan A. Van Mieghem, 1999. "Coordinating Investment, Production, and Subcontracting," Management Science, INFORMS, vol. 45(7), pages 954-971, July.
    29. John R. Birge, 2000. "Option Methods for Incorporating Risk into Linear Capacity Planning Models," Manufacturing & Service Operations Management, INFORMS, vol. 2(1), pages 19-31, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Di Corato, Luca & Moretto, Michele & Rossini, Gianpaolo, 2017. "Financing flexibility: The case of outsourcing," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 35-65.
    2. Hyun-Joon Jo & Timothy Connerton & Hyun-Jung Kim, 2019. "Dynamic Outsourcing Development for Sustainable Competitive Advantage in a High-Tech Backend Semiconductor Equipment Firm," Sustainability, MDPI, vol. 12(1), pages 1-13, December.
    3. Di Corato, Luca & Montinari, Natalia, 2014. "Flexible waste management under uncertainty," European Journal of Operational Research, Elsevier, vol. 234(1), pages 174-185.
    4. Tsekrekos, Andrianos E. & Yannacopoulos, Athanasios N., 2016. "Optimal switching decisions under stochastic volatility with fast mean reversion," European Journal of Operational Research, Elsevier, vol. 251(1), pages 148-157.
    5. M. Moretto & G. Rossini, 2015. "Vertical flexibility, outsourcing and the financial choices of the firm," Working Papers wp1009, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Heydari, Jafar & Govindan, Kannan & Ebrahimi Nasab, Hamid Reza & Taleizadeh, Ata Allah, 2020. "Coordination by quantity flexibility contract in a two-echelon supply chain system: Effect of outsourcing decisions," International Journal of Production Economics, Elsevier, vol. 225(C).
    7. Wang, Yulan & Wallace, Stein W. & Shen, Bin & Choi, Tsan-Ming, 2015. "Service supply chain management: A review of operational models," European Journal of Operational Research, Elsevier, vol. 247(3), pages 685-698.
    8. Wenbo Shi & Tianke Feng, 2016. "Examining supply contracts under cost and demand uncertainties from supplier’s perspective: a real options approach," International Journal of Production Research, Taylor & Francis Journals, vol. 54(1), pages 83-97, January.
    9. Awasthy, Prakash & Hazra, Jishnu, 2020. "Collaboration under outcome-based contracts for information technology services," European Journal of Operational Research, Elsevier, vol. 286(1), pages 350-359.
    10. Mohammed Alkahtani, 2022. "Mathematical Modelling of Inventory and Process Outsourcing for Optimization of Supply Chain Management," Mathematics, MDPI, vol. 10(7), pages 1-27, April.
    11. Fernandes, Rui & Gouveia, Borges & Pinho, Carlos, 2013. "A real options approach to labour shifts planning under different service level targets," European Journal of Operational Research, Elsevier, vol. 231(1), pages 182-189.
    12. Gutiérrez, Óscar, 2020. "On the definition of the investment-uncertainty relationship," Journal of Economics and Business, Elsevier, vol. 112(C).
    13. Cruz, Antonio Miguel & Haugan, Gregory L. & Rincon, Adriana Maria Rios, 2014. "The effects of asset specificity on maintenance financial performance: An empirical application of Transaction Cost Theory to the medical device maintenance field," European Journal of Operational Research, Elsevier, vol. 237(3), pages 1037-1053.
    14. Bieniek, Milena, 2015. "A note on the facility location problem with stochastic demands," Omega, Elsevier, vol. 55(C), pages 53-60.
    15. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    16. Gao, Yongling & Driouchi, Tarik, 2018. "Accounting for ambiguity and trust in partial outsourcing: A behavioral real options perspective," Journal of Business Research, Elsevier, vol. 92(C), pages 93-104.
    17. Nookabadi, Ali Shahandeh, 2016. "Outsource planning through option contracts with demand and cost uncertaintyAuthor-Name: Nosoohi, Iman," European Journal of Operational Research, Elsevier, vol. 250(1), pages 131-142.
    18. Mahadevan, B. & Hazra, Jishnu & Jain, Tarun, 2017. "Services outsourcing under asymmetric cost information," European Journal of Operational Research, Elsevier, vol. 257(2), pages 456-467.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Li, Shanling & Wang, Letian, 2010. "Outsourcing and capacity planning in an uncertain global environment," European Journal of Operational Research, Elsevier, vol. 207(1), pages 131-141, November.
    2. Murat Erkoc & Huaqing Wang & Anas Ahmed, 2018. "Price Competition with Geometric Brownian motion in Exchange Rate Uncertainty," Papers 1804.08153, arXiv.org.
    3. Lingxiu Dong & Panos Kouvelis & Ping Su, 2010. "Global Facility Network Design with Transshipment and Responsive Pricing," Manufacturing & Service Operations Management, INFORMS, vol. 12(2), pages 278-298, February.
    4. Jiao Wang & Lima Zhao & Arnd Huchzermeier, 2021. "Operations‐Finance Interface in Risk Management: Research Evolution and Opportunities," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 355-389, February.
    5. Lauren Xiaoyuan Lu & Jan A. Van Mieghem, 2009. "Multimarket Facility Network Design with Offshoring Applications," Manufacturing & Service Operations Management, INFORMS, vol. 11(1), pages 90-108, October.
    6. John R. Birge, 2015. "OM Forum—Operations and Finance Interactions," Manufacturing & Service Operations Management, INFORMS, vol. 17(1), pages 4-15, February.
    7. Di Corato, Luca & Moretto, Michele & Rossini, Gianpaolo, 2017. "Financing flexibility: The case of outsourcing," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 35-65.
    8. M. Moretto & G. Rossini, 2015. "Vertical flexibility, outsourcing and the financial choices of the firm," Working Papers wp1009, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. Zhao, Lima & Huchzermeier, Arnd, 2017. "Integrated operational and financial hedging with capacity reshoring," European Journal of Operational Research, Elsevier, vol. 260(2), pages 557-570.
    10. Vernon N. Hsu & Kaijie Zhu, 2011. "Tax-Effective Supply Chain Decisions Under China's Export-Oriented Tax Policies," Manufacturing & Service Operations Management, INFORMS, vol. 13(2), pages 163-179, November.
    11. Qi Feng & Lauren Xiaoyuan Lu, 2012. "The Strategic Perils of Low Cost Outsourcing," Management Science, INFORMS, vol. 58(6), pages 1196-1210, June.
    12. Dong, Lingxiu & Kouvelis, Panos & Su, Ping, 2013. "Global facility network design in the presence of competition," European Journal of Operational Research, Elsevier, vol. 228(2), pages 437-446.
    13. Gunasekaran, Angappa & Irani, Zahir & Choy, King-Lun & Filippi, Lionel & Papadopoulos, Thanos, 2015. "Performance measures and metrics in outsourcing decisions: A review for research and applications," International Journal of Production Economics, Elsevier, vol. 161(C), pages 153-166.
    14. Tsekrekos, Andrianos E. & Yannacopoulos, Athanasios N., 2016. "Optimal switching decisions under stochastic volatility with fast mean reversion," European Journal of Operational Research, Elsevier, vol. 251(1), pages 148-157.
    15. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    16. Kazaz, Burak, 2014. "1 > 2? Less is more under volatile exchange rates in global supply chains," Business Horizons, Elsevier, vol. 57(4), pages 521-531.
    17. Dong, Lingxiu & Kouvelis, Panos & Su, Ping, 2014. "Operational hedging strategies and competitive exposure to exchange rates," International Journal of Production Economics, Elsevier, vol. 153(C), pages 215-229.
    18. Mustafa Akan & Bar{i}c{s} Ata & Martin A. Lariviere, 2011. "Asymmetric Information and Economies of Scale in Service Contracting," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 58-72, September.
    19. Kim, Kyoung-Kuk & Park, Kun Soo, 2014. "Transferring and sharing exchange-rate risk in a risk-averse supply chain of a multinational firm," European Journal of Operational Research, Elsevier, vol. 237(2), pages 634-648.
    20. Nagesh N. Murthy & Milind Shrikhande & Ajay Subramanian, 2007. "Switching costs, dynamic uncertainty, and buyer–seller relationships," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(8), pages 859-873, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:219:y:2012:i:2:p:272-283. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.