How Sourcing of Interdependent Components Affects Quality in Automotive Supply Chains

Abstract

In the automotive industry, many firms source key components from different suppliers, even though the components may function interdependently. In this study, we investigate how component level interdependence impacts quality performance and analyze how various operational factors moderate this relation. We synthesize information from several case studies to model the quality challenges faced by an automotive firm. For several sub‐assemblies that go into its products, the firm sourced key components from two different suppliers. The sub‐assemblies would fail whenever a component fails, but due to interdependent operations, failure of one component could cause the failure of the other. The firm found it challenging to improve the suppliers' quality performance as it was difficult to trace the failures to specific components. Our analysis reveals that – (i) the impact of interdependence is governed by the supply chain structure: reducing the interdependence between components improves quality when suppliers provide the components, but reducing interdependence worsens quality when the firm manufactures the entire sub‐assembly; and (ii) the relation between interdependence and quality performance is moderated by factors such as penalties, production costs, and interdependence costs. Additionally, we find that quality performance is lower when the firm outsources the components than when the firm manufactures the entire sub‐assembly. We identify coordinating mechanisms that leverage incentives and penalties to bridge the quality performance gap.

Sharing Quality‐Distribution Information for the Selective Assembly of Intermediary Components in the Automotive Industry

“…Although the FBSAI performed in the automotive industry (as described in the above example) is the setting for our study, there is no reason to limit the applicability of FBSAI to this particular type of manufacturing assembly. Coordinated component design and quality control has become important and challenging simply because of prevalent outsourcing practices (Agrawal et al 2017). As an example, Boeing outsources more than 30% of its components and subassemblies for its 787 aircraft (Denning 2013), GE outsources more than 46%, and Caterpillar more than 39% (Matthews 2012).…”

Bilateral dependency and supplier performance ambiguity in supply chain contracting: Evidence from the railroad industry

“…The organization‐theoretic basis for such approaches lies in power‐based theories of organizational boundaries (Santos & Eisenhardt, 2005). The empirical supply chain literature on the topic is as massive as it is diverse (e.g., Agrawal, Muthulingam, & Rajapakshe, 2017; Brinkhoff, Özer, & Sargut, 2015; Crook & Combs, 2007; Gray & Handley, 2015; Handley & Benton, 2012; Maloni & Benton, 2000; Nyaga, Whipple, & Lynch, 2010; Plambeck & Taylor, 2005; Villena & Craighead, 2017).…”

“…However, tracing a design flaw is challenging in fragmented supply chains (Hora, Bapuji, & Roth, 2011: 769; Skilton & Robinson, 2009), particularly since admitting product design flaws can have severe financial consequences for the designer or the OEM (e.g., Tang, 2008). Further, redesign may be ineffective, because it hinges on the assumption that faulty design can be confirmed as the cause of the failure (Agrawal et al, 2017; Peerally, Carr, Waring, & Dixon‐Woods, 2017). In systems that interact with the environment, failures may be caused by exogenous shocks, such as a foreign substance entering the system, making the root cause difficult to identify (Starbuck & Farjoun, 2005).…”

“…The implications of buyer–supplier interdependence for both supply chain relationships (e.g., Hoetker, Swaminathan, & Mitchell, 2007; Mahapatra, Narasimhan, & Barbieri, 2010) and firm boundaries (Novak & Eppinger, 2001; Sosa, Eppinger, & Rowles, 2004; Ulrich & Ellison, 2005) are well established. The role of supply chain contracting in the context of quality failures (e.g., Zu & Kaynak, 2012) and supplier performance ambiguity (Agrawal et al, 2017; Mellewigt, Hoetker, & Lütkewitte, 2018) has also been scrutinized in detail. There are many authors who write about the importance of avoiding lock‐in by either using multiple suppliers for the same component, or maintaining component production capabilities in‐house as well (e.g., Gray & Handley, 2015; Mahapatra et al, 2010).…”

“…Specifically, some subsystems are more problematic than others are not because they fail more often, but because in case of failures, they interact with other subsystems (Novak & Wernerfelt, 2012). Concomitant failures are particularly problematic (Agrawal et al, 2017).…”