A Review of Production and Operations Management Research on Outsourcing in Supply Chains: Implications for the Theory of the Firm

Abstract

This paper reviews the state of the art in Productions and Operations Management (POM) academic research regarding outsourcing in supply chain contexts. We first acknowledge the “Theory of the Firm” (ToF), the venerable and vast body of thought regarding where the firm draws the boundary between what it performs in‐house and what it outsources. Despite the clear linkage between outsourcing and POM, the ToF literature is most closely associated with the fields of strategy and economics. This disconnect might in part be due to a difference in theoretical lenses and terminology, which we address for the POM audience by providing a ToF tutorial. Our review of publications by the POM community from 2000 to 2016 includes a framework that organizes the in‐scope papers and a structured summary of each work. We partition the research into empirical/conceptual and analytical sub‐literatures, each of which gets its own critical assessment and discussion of open opportunities. Along the way, we articulate the features of the POM lens that distinctively position POM researchers to contribute further to the ToF, a convergence which we hope to encourage through this study. A deeper conversation among strategy, economics, and POM would enrichen the rigor and the relevance of each field.

Economies of collaboration in build‐to‐model operations

“…Due to asset specificity issues (economies of scale, tooling, and set-up costs), outsourcing is fundamentally a make-or-buy decision in conventional manufacturing settings (Williamson, 2008). Comparatively little research has explored outsourcing between the extremes of make or buy (Tsay et al, 2018), though partial outsourcing has been used to deal with demand peaks (Greaver, 1999;Scherrer-Rathje et al, 2014), and to reduce the risk of disruption (Quélin & Duhamel, 2003). Two-way partial outsourcing has received little attention in the literature, though in some situations outsourcing with a manufacturer both making and buying the same product has been proposed as a viable solution (Gray et al, 2009).…”

“…General‐purpose manufacturing simplifies supply chain ramp‐up, thereby reducing transaction costs while increasing the scope for interfirm agreement (Williamson, ), enabling on‐demand, single item production runs. Challenges also follow with general‐purpose technologies, as outsourcing is associated with a risk of copying (Tsay, Gray, Noh, & Mahoney, ). From a transaction cost economics perspective, these risks can be mitigated by mutual investment in manufacturing or contractual safeguards.…”

Value first, cost later: Total value contribution as a new approach to sourcing decisions

“…However, when they worked with local suppliers to take advantage of their own capabilities (e.g., in using plastics and designing quick-to-assemble fittings), they found new opportunities to both reduce cost and improve product features. 8 Referring to sourcing decisions as choices about an activity is common in the make-buy literature (see Tsay, Gray, Mahoney, & Noh, 2018, Section 2 for a review of that literature). The term activity allows consideration of the sourcing of goods and services.…”

The effect of firm size, asset ownership, and market prices on regulatory violations

“…However, ownership has disadvantages, such as increased costs of bureaucracy (Williamson, 1985) and less expertise in specific functions or activities (Balakrishnan, Mohan, & Seshadri, 2008). Accordingly, the make-or-buy decision is complex with many tradeoffs (Mantel, Tatikonda, & Liao, 2006;Tsay et al, 2018).…”

“…Firms use asset ownership as a strategy to reduce unwanted behavior by employees (Prendergast, 2017). Firms who own the assets (i.e., make) retain more control over how they are configured and used (Baker & Hubbard, 2003) compared to firms who contract with others for production purposes (i.e., buy; Grossman & Hart, 1986;Tsay, Gray, Noh, & Mahoney, 2018). This suggests that employees who work for firms that own the assets should have a reduced propensity to violate regulations on average and be less responsive to changing payoffs for violating.…”