Is Partial Sourcing Disadvantageous to Startup Suppliers Under Capacity-Shortage Threat?

Abstract

This article investigates the joint influence of a startup supplier's market-growth capability and its capacity-shortage threat on the attractiveness of partial sourcing (PS) over complete sourcing (CS) to that supplier. We develop an analytical model that accounts for this shortage threat and a positive relationship between the startup supplier's order quantity and its buyers’ product demand, while considering two forms—bounded versus unbounded order-induced effect—of this market-growth capability. We derive optimal order quantities under each sourcing structure, show how a revenue-sharing agreement coordinates the supply chain, and identify conditions under which the startup supplier should favor PS over CS. We find that PS delivers greater value to the startup supplier relative to CS if the order-induced effect is unbounded and capacity-shortage likelihood is high. Furthermore, when employing PS, the value to the startup supplier from a capacity-shortage threat appears to be greater when the supply chain is uncoordinated than when it is coordinated.