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Safeguarding the Promise of Production Outsourcing

Author

Listed:
  • Jason Amaral

    (Emeraldwise, LLC, PO Box 620720, Woodside, California 94062)

  • Corey A. Billington

    (IMD International, Ch. de Bellerive 23, PO Box 915, CH-1001 Lausanne, Switzerland)

  • Andy A. Tsay

    (Leavey School of Business, Santa Clara University, OMIS Department, 500 El Camino Real, Santa Clara, California 95053)

Abstract

Today’s product companies (original equipment manufacturers, or OEMs) increasingly outsource production, especially when the activities are asset intensive or require process technologies characterized by rapid innovation. When such an OEM also outsources the procurement of the required materials, especially to the party providing the production services, the OEM risks unpleasant surprises, such as unauthorized part or supplier substitutions, overbilling, mistreatment of the supply base, and the loss of the OEM’s procurement leverage. Based on supply chain audits and interviews in numerous industries, we propose and analyze strategies for preventing these outcomes when outsourcing production. We recommend that OEMs carefully consider the underlying means, motives, and opportunities of the service providers when deciding which activities to outsource and how to establish effective business controls. Firms such as Hewlett-Packard, Motorola, and Dell have implemented these ideas.

Suggested Citation

  • Jason Amaral & Corey A. Billington & Andy A. Tsay, 2006. "Safeguarding the Promise of Production Outsourcing," Interfaces, INFORMS, vol. 36(3), pages 220-233, June.
    • Handle: RePEc:inm:orinte:v:36:y:2006:i:3:p:220-233
    DOI: 10.1287/inte.1060.0210
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zormpas, Dimitrios, 2020. "Investments under vertical relations and agency conflicts: A real options approach," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 273-287.
    2. Dakare, Olamitunji & Ikenwa, Kenneth, 2016. "An Examination And Critique Of The Outsourcing Concept And Praxis," Management and Marketing Journal, University of Craiova, Faculty of Economics and Business Administration, vol. 0(2), pages 151-163, November.
    3. Guo, Pengfei & Song, Jing-Sheng & Wang, Yulan, 2010. "Outsourcing structures and information flow in a three-tier supply chain," International Journal of Production Economics, Elsevier, vol. 128(1), pages 175-187, November.
    4. Murat Kaya & Özalp Özer, 2009. "Quality risk in outsourcing: Noncontractible product quality and private quality cost information," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(7), pages 669-685, October.
    5. Karabay, Bilgehan, 2022. "A new dimension in global value chains: Control vs. delegation in input procurement," Journal of International Economics, Elsevier, vol. 137(C).
    6. Yang, Fiona X. & Zhang, Rachel Q. & Zhu, Kaijie, 2017. "Should purchasing activities be outsourced along with production?," European Journal of Operational Research, Elsevier, vol. 257(2), pages 468-482.
    7. Guoming Lai & Yixuan Liu & Wenqiang Xiao, 2021. "International Taxation and Production Outsourcing," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 402-418, February.
    8. 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.
    9. Deng, Sijing & Xu, Jiayan, 2023. "Manufacturing and procurement outsourcing strategies of competing original equipment manufacturers," European Journal of Operational Research, Elsevier, vol. 308(2), pages 884-896.
    10. Thakur-Wernz, Pooja & Bruyaka, Olga & Contractor, Farok, 2020. "Antecedents and relative performance of sourcing choices for new product development projects," Technovation, Elsevier, vol. 90.
    11. Molintas, Dominique Trual, 2015. "Globalisation & Emerging Markets: The case of India," MPRA Paper 96947, University Library of Munich, Germany.
    12. Xiang Fang & Kut C. So & Yunzeng Wang, 2008. "Component Procurement Strategies in Decentralized Assemble-to-Order Systems with Time-Dependent Pricing," Management Science, INFORMS, vol. 54(12), pages 1997-2011, December.
    13. Molintas, Dominique Trual, 2010. "Globalisation impact on Danish SME: Offshore Outsourcing & local competitiveness," MPRA Paper 96529, University Library of Munich, Germany.
    14. Pooja Thakur-Wernz & Olga Bruyaka, 2017. "Co-evolutionary Perspective on Sourcing Portfolios: Examining Sourcing Choices for Clinical Trials of Bio-pharmaceutical Firms," Management International Review, Springer, vol. 57(6), pages 909-946, December.
    15. Enis Kayis & Feryal Erhun & Erica L. Plambeck, 2013. "Delegation vs. Control of Component Procurement Under Asymmetric Cost Information and Simple Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 45-56, April.
    16. Zhang, Manman & Zhang, Juliang & Sun, Yue & Cheng, T.C.E., 2022. "How to outsource production considering quality management: Turnkey or buy-sell?," Omega, Elsevier, vol. 113(C).
    17. Yulan Wang & Baozhuang Niu & Pengfei Guo & Jing-Sheng Song, 2021. "Direct Sourcing or Agent Sourcing? Contract Negotiation in Procurement Outsourcing," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 294-310, March.
    18. Li, Dan & Chen, Jing & Liao, Yi, 2021. "Outsourcing strategy in the presence of the customer returns," International Journal of Production Economics, Elsevier, vol. 240(C).
    19. Li, Dong & Nagurney, Anna, 2015. "A general multitiered supply chain network model of quality competition with suppliers," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 336-356.

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