How Do Plural-Sourcing Firms Make and Buy? The Impact of Supplier Portfolio Design

Abstract

This paper uses the notion of contracting strategy to advance research in plural sourcing. We develop and test a theoretical framework to explain how plural-sourcing firms strike the make-and-buy balance depending on their contracting strategy. The focal firm's choice of a contracting strategy is associated with a specific supplier portfolio design, with a bargaining-based strategy resulting in many, narrowly capable suppliers with short tenure, and a relationship-based contracting strategy resulting in fewer, broadly capable suppliers with long tenure. Focal firms with the latter strategy incur lower overall contracting costs than those with the former, and therefore outsource more. Focal firms seek to influence contracting costs associated with their supplier portfolio for "nearly the same inputs" and "nearly the same suppliers". Empirical analysis corresponding to the two levels, namely patent prosecution and legal services at Fortune 500 firms, provide consistent support for our theory.

When Suppliers Shift My Boundaries: Supplier Employee Mobility and Its Impact on Buyer Firms’ Sourcing Strategy

“…Our framework considers plural-sourcing buyer firms that design their supplier portfolio with a view to managing relationships with suppliers as well as setting their make-and-buy balance (Sako et al, 2016). A range of sourcing strategies may be located on a continuum.…”

“…But such lock-in lowers contracting costs due to shared trust and relation-specific investments made by the buyer-supplier pair (Dyer, 1997;Dyer & Singh, 1998). This tilts the balance in favor of buying in plural sourcing (Sako et al, 2016).…”

“…Buyers also face increased costs of establishing transactional interfaces and coordinating with suppliers due to the disruption of intra-firm ties at supplier firms. While higher costs of contracting favor insourcing (Sako et al, 2016), this link is not obvious. Firms engage in a comparative assessment of the costs associated with different sourcing options and the costs of shifting to different sources of supply feature in firms' decisions (Williamson, 1985).…”

“…The imperfect transferability of employee social capital and associated uncertainty therefore increase the costs of contracting with suppliers experiencing employee losses and encourage insourcing (Sako, Chondrakis, & Vaaler, 2016). However, buyers need to balance increases in costs of contracting with the costs of adjusting in-house production and the costs of switching to alternative suppliers already in use.…”

“…These are important frictions that can limit changes in sourcing modes, and lead to heterogeneous sourcing strategies. Hence, our work is part of an emergent literature that explores the configuration of supplier relationships and their impact on contracting and governance (Argyres, Bercovitz, & Zanarone, 2020;Chatterji, Cunningham, & Joseph, 2019;Mawdsley & Somaya, 2018;Moeen et al, 2013;Sako et al, 2016).…”