Understanding the Supply Chain Outsourcing Cascade: When Does Procurement Follow Manufacturing Out the Door?

Abstract

Does the outsourcing of manufacturing trigger a cascade of follow‐on outsourcing, wherein related procurement activities are subsequently entrusted to one's outsourcing partner? We explored this question in a survey of US‐based electronics original equipment manufacturers (OEMs) who have outsourced production to a contract manufacturer (CM). Transaction‐cost economics and the resource‐based view were used as theoretical lenses to assess six potential drivers of this decision, utilizing direct and indirect‐effects structural models across five phases of procurement activity. Results suggest that some sets of conditions appear to lend themselves to a “wholesale” outsourcing approach, wherein the CM is entrusted to both manufacture a product and engage in various procurement activities. Other conditions foster a more “retail” approach to procurement outsourcing, with limited or no follow‐on outsourcing of procurement activities. In general, firms seem more comfortable outsourcing tactical procurement activities, entrusting strategic activities to CMs only when the product is highly commoditized or when the CM controls access to international resources the OEM is unable to leverage on its own. Overall, the relationship between manufacturing and procurement outsourcing is complex and contingent on a variety of factors.