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Sourcing By Design: Product Complexity and the Supply Chain

  • 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)

Registered author(s):

    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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    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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    5. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
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    16. Fujimoto, Takahiro, 1997. "The Japanese Automobile Supplier System Framework, Facts, and Reinterpretation (preliminary draft)," CIRJE F-Series 97-F-13, CIRJE, Faculty of Economics, University of Tokyo.
    17. Ulrich, Karl, 1995. "The role of product architecture in the manufacturing firm," Research Policy, Elsevier, vol. 24(3), pages 419-440, May.
    18. Kim B. Clark, 1989. "Project Scope and Project Performance: The Effect of Parts Strategy and Supplier Involvement on Product Development," Management Science, INFORMS, vol. 35(10), pages 1247-1263, October.
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    20. Pimmler, Thomas U. (Thomas Udo) & Eppinger, Steven D., 1994. "Integration analysis of product decompositions," Working papers 3690-94., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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