Essays on manufacturing outsourcing Public Deposited

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  • March 20, 2019
  • Gray, John Vincent
    • Affiliation: Kenan-Flagler Business School
  • The outsourcing of manufacturing resources has been occurring for many years, and is increasing in many industries. There exists some well developed theory under the headings of "make-buy," "firm boundaries," "economics of organization," and "vertical integration." Outsourcing, or the turning over of an activity to an outside vendor, is a subset of these vast literature streams. In this dissertation, we draw from the manufacturing strategy, economics, and business strategy literature to enhance the existing economic theory of outsourcing by incorporating an operations strategy lens. Specifically, we look how manufacturing outsourcing influences-and is influenced by-a firm's cost and quality capabilities. We do this through three separate essays using multiple methods. All three essays arose from an iterative process of literature review and practitioner interviews. The essays are related both in their grounding in existing literature and theory and in their focus on the relationship between manufacturing capabilities and outsourcing decisions and outcomes. In the first essay, "The Effect of Learning and Strategic Behavior on Manufacturing Outsourcing Decisions," we analytically evaluate how the presence of learning-by-doing and strategic behavior by both parties affects a major outsourcing decision in a two-period game. Previous analytic work that has assessed the effect of learning on outsourcing neglected the possibility of opportunism by the supplier. To fill this gap, we analyze a two-period game involving a firm that has the opportunity to outsource some portion iii of its volume to a contract manufacturer. Both firms can reduce their production cost through learning-by-doing. When the contract manufacturer is the Stackelberg leader, we obtain several interesting results. These include showing that the contract manufacturer's learning can benefit the buying firm, but only if the buying firm also learns. We also show that learning by the buying firm can either help or hurt the contract manufacturer. In addition, we find that below-cost transfer pricing by the contract manufacturer will occur. We also analyze alternative bargaining arrangements. This essay analytically shows the importance of considering both learning-by-doing and possible future opportunism when deciding whether or not to outsource. In the second essay, "Outsourcing of Manufacturing Resources: The Effect of Manufacturing Capabilities and Priorities" we empirically analyze relationships between operations capabilities and priorities (quality and cost) and a firm's plans to outsource. This essay extends the existing research on antecedents of outsourcing in two ways. First, we make theoretical arguments about specifically which firm-specific operations capabilities and priorities relate to plans to outsource. This is different from the extant literature which looks at a single capability proxy, if capabilities are considered at all. Second, we develop operational metrics and test the hypotheses using structural equation modeling. We find, as expected, that cost capability and importance impact outsourcing plans. Surprisingly, we find that quality capability and importance do not matter. The third essay is entitled "Buyer Beware? Quality Risk in Manufacturing Outsourcing." Here, linked to the second essay, we examine whether quality capability and importance should relate to outsourcing plans. We draw from literature in supply chain management, total quality management, and economics to argue that outsourcing production to contract manufacturers does pose a quality risk. We draw from similar literature to also propose that ISO 9000 does little to mitigate this risk. We use eleven years of Food and Drug Administration (FDA) inspection results from the United States drug industry as a proxy for quality risk. We interview a panel of industry experts using the Delphi process to transform the raw data to a usable "quality risk" score. After classifying 154 plants from the database as either "contract manufacturer" or "internal plant," we use ordered logit regression on our quality risk score to show that outsourcing to contract manufacturers does pose a quality risk; and that being ISO 9000 certified does not alter a firm's quality risk.
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  • Gilland, Wendell G.
  • Open access

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