Sourcing strategies in a multi-tier supply chain: impact of inventory ownership and vendor-managed inventory

This study investigates how sourcing strategies and inventory ownership arrangements shape performance in a three-tier manufacturing supply chain consisting of an original equipment manufacturer (OEM), a contract manufacturer (CM), and a component supplier (CS). We compare sequential sourcing, where the OEM delegates both production and sourcing to the CM, with directed sourcing, where the OEM directly manages the CS. These choices restructure contractual governance and inventory ownership, influencing supplier incentives, quality improvement, and profit distribution. Beyond sourcing, we examine vendor-managed inventory (VMI), a mechanism that shifts inventory ownership to suppliers. Incorporating both sourcing strategies and VMI adoption, we analyze four configurations: sequential sourcing, directed sourcing, sequential sourcing with VMI, and directed sourcing with VMI. Using analytical modeling and numerical simulations, we identify the business conditions under which each configuration achieves superior outcomes in quality, demand, and profits. The results demonstrate that directed sourcing consistently outperforms sequential sourcing by stimulating supplier quality investment and enhancing overall profitability. The impact of VMI is more nuanced: it improves outcomes only when inventory reductions are substantial and collaborative capabilities strong; otherwise, it merely transfers inventory burdens to suppliers without efficiency gains. By integrating multi-tier sourcing governance with inventory ownership structures, this study extends sourcing research beyond dyadic perspectives and provides actionable guidance on when directed sourcing alone is sufficient and when it should be complemented by VMI.