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Sourcing By Design: Product Complexity and the Supply Chain

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Author Info

  • Sharon Novak

    ()
    (Kellogg Graduate School of Management, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208-2009)

  • Steven D. Eppinger

    ()
    (Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, Massachusetts 02142)

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    Abstract

    This paper focuses on the connection between product complexity and vertical integration using original empirical evidence from the auto industry. A rich literature has addressed the choice between internal production and external sourcing of components in the auto industry. More recent literature has developed the concept of product architecture as another choice variable that may be one of the important contributors to product complexity. In this paper, we connect these two important decisions and study them jointly. We use the property rights approach to argue that complexity in product design and vertical integration of production are complements: that in-house production is more attractive when product complexity is high, as firms seek to capture the benefits of their investment in the skills needed to coordinate development of complex designs. We test this hypothesis with a simultaneous equations model applied to data from the luxury-performance segment of the auto industry. We find a significant and positive relationship between product complexity and vertical integration. This has implications for optimal incentive structures within firms, as well as for interpreting firm performance.

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    File URL: http://dx.doi.org/10.1287/mnsc.47.1.189.10662
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 47 (2001)
    Issue (Month): 1 (January)
    Pages: 189-204

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    Handle: RePEc:inm:ormnsc:v:47:y:2001:i:1:p:189-204

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    Related research

    Keywords: Product Development; Product Complexity; Product Architecture; Property Rights; Transaction Costs; Vertical Integration; Automotive Industry; Supply Chain Management;

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    Cited by:
    1. Sanchez, Ron & Mahoney, Joseph T., 2012. "Modularity and Economic Organization: Concepts, Theory, Observations, and Predictions," Working Papers 12-0101, University of Illinois at Urbana-Champaign, College of Business.
    2. Roy, Subroto & Sivakumar, K., 2010. "Innovation generation in upstream and downstream business relationships," Journal of Business Research, Elsevier, vol. 63(12), pages 1356-1363, December.
    3. Jeremy T. Fox, 2008. "Estimating Matching Games with Transfers," NBER Working Papers 14382, National Bureau of Economic Research, Inc.
    4. Caridi, Maria & Pero, Margherita & Sianesi, Andrea, 2012. "Linking product modularity and innovativeness to supply chain management in the Italian furniture industry," International Journal of Production Economics, Elsevier, vol. 136(1), pages 207-217.
    5. Cheng, Liang-Chieh (Victor), 2011. "Assessing performance of utilizing organizational modularity to manage supply chains: Evidence in the US manufacturing sector," International Journal of Production Economics, Elsevier, vol. 131(2), pages 736-746, June.
    6. Steven Globerman & Aidan Vining, 2004. "The Outsourcing Decision: A Strategic Framework," International Trade 0404007, EconWPA.
    7. Sharon Novak & Scott Stern, 2007. "How Does Outsourcing Affect Performance Dynamics? Evidence from the Automobile Industry," NBER Working Papers 13235, National Bureau of Economic Research, Inc.
    8. Hempell, Thomas & Zwick, Thomas, 2005. "Technology Use, Organisational Flexibility and Innovation: Evidence for Germany," ZEW Discussion Papers 05-57, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Paulo J. Gomes & Nitin R. Joglekar, 2008. "Linking modularity with problem solving and coordination efforts," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(5), pages 443-457.
    10. Swafford, Patricia M. & Ghosh, Soumen & Murthy, Nagesh, 2008. "Achieving supply chain agility through IT integration and flexibility," International Journal of Production Economics, Elsevier, vol. 116(2), pages 288-297, December.
    11. Gerwin, Donald, 2006. "Buyer-vendor relations for components: The extreme example of custom integrated circuits," Research Policy, Elsevier, vol. 35(5), pages 673-690, June.
    12. Wong, Christina W.Y. & Lai, Kee-hung & Shang, Kuo-Chung & Lu, Chin-Shan & Leung, T.K.P., 2012. "Green operations and the moderating role of environmental management capability of suppliers on manufacturing firm performance," International Journal of Production Economics, Elsevier, vol. 140(1), pages 283-294.
    13. Blome, Constantin & Schoenherr, Tobias & Eckstein, Dominik, 2014. "The impact of knowledge transfer and complexity on supply chain flexibility: A knowledge-based view," International Journal of Production Economics, Elsevier, vol. 147(PB), pages 307-316.
    14. Florent Catel & Jean-Charles Monateri, 2005. "Strategic perspectives on modularity," Post-Print halshs-00097733, HAL.
    15. Brahm, Francisco & Tarziján, Jorge, 2012. "The impact of complexity and managerial diseconomies on hierarchical governance," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 586-599.
    16. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.
    17. Sharon Novak & Scott Stern, 2007. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," NBER Working Papers 13232, National Bureau of Economic Research, Inc.
    18. Droge, Cornelia & Vickery, Shawnee K. & Jacobs, Mark A., 2012. "Does supply chain integration mediate the relationships between product/process strategy and service performance? An empirical study," International Journal of Production Economics, Elsevier, vol. 137(2), pages 250-262.

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