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Competitive outsourcing: choosing between value-added services and key component supplying capability

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  • Yen-Ting Lin
  • Ying-Ju Chen

Abstract

We examine outsourcing strategies of two competing firms. Each of the firms outsources product manufacturing to one of the two manufacturers. In addition to product manufacturing, the first manufacturer also produces a key component that is required by every product. On the other hand, the second manufacturer provides additional services that enhance product value. We characterise the firms’ equilibrium choice of outsourced manufacturers. We demonstrate that difference in the manufacturers’ operational advantages can result in asymmetric outsourcing decisions for ex-ante symmetric firms. Firm profitability can be Pareto improved when the manufacturer who produces the key component gains first-mover advantage. Moreover, that manufacturer can benefit from the entrance of a competitor in the key component market. Finally, even though the firms select their outsourced manufacturers based on self-interest, the resulting equilibrium outsourcing scenario can be the one that also maximises profitability of the manufacturers and the entire supply chain.

Suggested Citation

  • Yen-Ting Lin & Ying-Ju Chen, 2015. "Competitive outsourcing: choosing between value-added services and key component supplying capability," International Journal of Production Research, Taylor & Francis Journals, vol. 53(12), pages 3635-3650, June.
    • Handle: RePEc:taf:tprsxx:v:53:y:2015:i:12:p:3635-3650
    DOI: 10.1080/00207543.2014.985394
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    Cited by:

    1. Bin Hu & Yunke Mai & Saša Pekeč, 2020. "Managing Innovation Spillover in Outsourcing," Production and Operations Management, Production and Operations Management Society, vol. 29(10), pages 2252-2267, October.
    2. Weihua Liu & Shangsong Long & Yanjie Liang & Jinkun Wang & Shuang Wei, 2023. "The influence of leadership and smart level on the strategy choice of the smart logistics platform: a perspective of collaborative innovation participation," Annals of Operations Research, Springer, vol. 324(1), pages 893-935, May.
    3. Kim, Dong W. & Trimi, Silvana & Hong, Soon G. & Lim, Seongbae, 2020. "Effects of co-creation on organizational performance of small and medium manufacturers," Journal of Business Research, Elsevier, vol. 109(C), pages 574-584.
    4. Shiming Yi & Liying Yu & Ziyuan Zhang, 2020. "Research on Pricing Strategy of Dual-Channel Supply Chain Based on Customer Value and Value-Added Service," Mathematics, MDPI, vol. 9(1), pages 1-19, December.
    5. Yingjie Ju & Yue Wang & Ye Cheng & Jun Jia, 2019. "Investigating the Impact Factors of the Logistics Service Supply Chain for Sustainable Performance: Focused on Integrators," Sustainability, MDPI, vol. 11(2), pages 1-16, January.
    6. Huang, Hongfu & Liu, Feng & Zhang, Peng, 2021. "To outsource or not to outsource? Warranty service provision strategies considering competition, costs and reliability," International Journal of Production Economics, Elsevier, vol. 242(C).

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