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Optimal Second-Stage Outsourcing

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  • Richard Saouma

    (Anderson Graduate School of Management, University of California, Los Angeles, Los Angeles, California 90095)

Abstract

Manufacturers have recently begun outsourcing product assembly and completion tasks to their suppliers. Such outsourcing solves several contracting problems but generates new incentive frictions between manufacturers and their suppliers. In this paper, we analyze a manufacturer's decision to outsource an assembly (second-stage) task to a preestablished supplier. We find that outsourcing second-stage tasks becomes more attractive as the cost of either the first- or second-stage activity rises. Outsourcing becomes less attractive when the supplier is unable to accept large levels of liability. The manufacturer is shown to prefer more testing when she outsources assembly to her supplier as opposed to when she assembles products in house. Last, we find that the contracting frictions identified persist when the supplier's work can be tested individually, albeit imperfectly.

Suggested Citation

  • Richard Saouma, 2008. "Optimal Second-Stage Outsourcing," Management Science, INFORMS, vol. 54(6), pages 1147-1159, June.
    • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:6:p:1147-1159
    DOI: 10.1287/mnsc.1070.0834
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    References listed on IDEAS

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    Cited by:

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    4. Pun, Hubert, 2014. "Supplier selection of a critical component when the production process can be improved," International Journal of Production Economics, Elsevier, vol. 154(C), pages 127-135.
    5. Guo Li & Lin Li & Mengqi Liu & Suresh P. Sethi, 2020. "Impact of power structures in a subcontracting assembly system," Annals of Operations Research, Springer, vol. 291(1), pages 475-498, August.
    6. Eldenburg, Leslie G. & Price, Richard A. & Román, Francisco J., 2019. "An exploratory study of factors affecting the longevity of manufacturing operations offshore," Accounting, Organizations and Society, Elsevier, vol. 75(C), pages 59-78.
    7. DeYong, Gregory D. & Pun, Hubert, 2015. "Is dishonesty the best policy? Supplier behaviour in a multi-tier supply chain," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 1-13.
    8. Yan Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2016. "Quality Management in Multi-Level Supply Chains with Outsourced Manufacturing," Production and Operations Management, Production and Operations Management Society, vol. 25(2), pages 290-305, February.
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