Saving costs and improving selling through competitor cooperation in sourcing

Abstract

We study the strategic value of cooperation between competitors in sourcing. Two firms procure from a supplier and sell to markets with uncertain demand. The firms can unilaterally procure from the supplier but obtain products from each other on a needed basis, which we call horizontal sourcing, or procure from the supplier together, which we call joint sourcing. Either horizontal or joint sourcing enables the firms to mitigate quantity pressure and improve selling (save cost) when the supplier offers a sufficiently weak (strong) discount incentive, making them strategic substitutes. The two sourcing strategies are complements as well because the firms can redeploy resources in between to profit from the synergies between markets only by horizontal sourcing. The firms profit more by joint sourcing than horizontal sourcing for the higher efficiency gain received from cost reduction (market selling improvement) when the supplier's discount incentive is strong (weak). Once the firms adopt joint sourcing, strategic substitutability causes them to forgo horizontal sourcing when markets are deterministic, but strategic complementarity can entice them to further adopt horizontal sourcing when markets are volatile. Once the firms adopt horizontal souring, they always have an incentive to further engage in joint sourcing. Empowered to manage wholesale pricing, the supplier can deter the firms from adopting joint sourcing but develop horizontal sourcing into an instrument that benefits every party in the supply chain, unless the competition pressure on the firms is strong and the supplier's production cost is sufficiently high.