Choice of supply chain governance: Self-managing or outsourcing?

As the outsourcing of key supplies and business processes becomes increasingly popular, the effective management of the outsourced business functions is of critical importance in supply chain management. Instead of managing all supply chain activities by themselves, many firms have chosen to transfer the governance of certain supply chain processes to third parties for lower cost and better service levels. This paper addresses the selection of the supply chain governance mode between self-managing and outsourcing from the perspective of the focal companies. To facilitate the decision-making process, we develop a model to investigate supply chain performance where knowledge transfer and compliance effort are two determinant factors. Mathematical properties related to the existence, uniqueness, and monotonicity of the model solution are derived. The results show that the optimal governance mode of the supply chain depends on the characteristics of the chain. Specifically, outsourcing to a third-party can function well only if the external coordinator can ensure low knowledge transfer cost along the supply chain. Self-managing by the focal company is preferred if the company can keep the cost of the compliance effort low.