Knowledge‐Based View of the Use of an Intermediary in New Product Manufacturing Outsourcing

Abstract

ABSTRACTIn this article, we introduce a game‐theoretic model to examine the impact of outsourcing knowledge, as well as firm‐ and market‐level factors, on a buyer's decision of whether to employ a supply chain intermediary or an agent to identify a manufacturer for her new product. The buyer faces two options: identify the manufacturer directly or explore outsourcing indirectly through an agent. In the case of direct outsourcing, the buyer evaluates, negotiates with, and identifies the manufacturers in‐house, whereas, under indirect outsourcing, the agent takes over these activities in exchange for a commission based on the transaction value between the buyer and the manufacturer. The model introduced in this article captures the buyer–agent incentive misalignment. Unexpectedly, we find that although attractiveness of indirect outsourcing increases as the buyer's outsourcing knowledge increases, it follows an inverse‐U shape as the agent gains more outsourcing knowledge. We further demonstrate that the observability of the buyer's outsourcing knowledge is another key driver of the outsourcing‐mode strategy. In addition, we show that the buyer's tendency to explore indirect outsourcing is greater if the sensitivity to the retail price or the commission rate is higher, or the base demand or cost of delayed time‐to‐market associated with the new product is lower. We extend our analysis to consider a contract form, whereby the agent's commission payment is driven by the expected savings generated for the buyer, and to consider the setting in which the buyer's outsourcing knowledge is private information.