Outsourcing Service Processes to a Common Service Provider under Price and Time Competition (original) (raw)

Outsourcing via Service Competition

Management Science, 2007

We consider a single buyer who wishes to outsource a fixed demand for a manufactured good or service at a fixed price to a set of potential suppliers. We examine the value of competition as a mechanism for the buyer to elicit service quality from the suppliers. We compare two approaches the buyer could use to orchestrate this competition: (1) a Supplier-Allocation (SA) approach, which allocates a proportion of demand to each supplier with the proportion allocated to a supplier increasing in the quality of service the supplier promises to offer, and (2) a Supplier-Selection (SS) approach, which allocates all demand to one supplier with the probability that a particular supplier is selected increasing in the quality of service to which the supplier commits. In both cases, suppliers incur a cost whenever they receive a positive portion of demand, with this cost increasing in the quality of service they offer and the demand they receive. The analysis reveals that (a) a buyer could indeed orchestrate a competition among potential suppliers to promote service quality, (b) under identical allocation functions, the existence of a demand-independent service cost gives a distinct advantage to SS type competitions, in terms of higher service quality for the buyer and higher expected profit for the supplier, (c) the relative advantage of SS versus SA depends on the magnitude of demand-independent versus demand-dependent service costs, (d) in the presence of a demand-independent service cost, a buyer should limit the number of competing suppliers under SA competition but impose no such limits under SS competition, and (e) a buyer can induce suppliers to provide higher service levels by selecting an appropriate allocation function. We illustrate the impact of these results through three example applications.

Services outsourcing under asymmetric cost information

European Journal of Operational Research, 2016

In this paper, we investigate the impact of cost heterogeneity on the optimal sourcing strategy of a client firm that outsources her service requirements to a set of outside vendors/service providers. We analyze a typical situation involving service providers, who differ from one another with respect to the marginal cost and characterize the firm's optimal size of vendor network. In our model, the client firm does not have complete information about the vendors' cost structure. From the client firm's perspective, for the case when the open market demand distribution is Uniform and the buyer's demand is Normally distributed, we analytically derive the capacity to be procured as well as and the optimal number of vendors to be awarded the contract. Our analysis reveals that with an increase in vendor base cost heterogeneity, the optimum number of required vendors decreases. We further conclude that when the mean demand of the client firm is below a threshold value, then as the client firm's demand variability increases, the optimal number of vendors increases. Whereas, in case the client firm's mean demand is above the threshold value, then the optimal size of vendor base decreases as the client firm's demand variability increases.

Service Channel Choice for Supply Chain: Who is Better Off by Undertaking the Service

I n recent years, increasing interests have arisen in adding product value through the provision of service. This study considers the problem in which a demand-enhancing service can be provided by different supply chain parties, resulting in four alternative service channels: (a) manufacturer undertaking service, namely M-channel, (b) retailer undertaking service, namely R-channel, (c) manufacturer outsourcing service to third-party (3P), namely M-3P-channel, and (d) retailer outsourcing service to 3P, namely R-3P-channel. We quantitatively model these service channels and derive the optimal decisions with the following observations: When the service costs are equal for the different parties, there is a conflict in service channel choice since both the manufacturer and the retailer prefer to undertake the service or hire the 3P by themselves, although M-channel generates the highest market demand and system profit; When the service costs are different among these parties, R-channel and 3P-channels are more preferable if the service cost is less sensitive to the service level and if the market demand is more sensitive to the service level. We also conduct an empirical study to test some of the insights developed from the analytical models; our empirical findings support the analytical results.

Business Services Outsourcing by Manufacturing Firms

Industrial and Corporate Change, 2007

Outsourcing of services is one of the most important phenomena that are reshaping firms’ boundaries in the last decades. This article assesses the reasons leading manufacturing firms to contract out some service activities instead of providing them internally. The theoretical framework, inspired in transaction cost economics, emphasizes the effects that firm heterogeneity and service-specific decisions have on the decision to outsource. Our empirical analysis, using Spanish firm data, suggests the relevance of nonlineal effects related to firm size, wage differentials and location, among other factors, with clear differences among groups of services.

Outsourcing and Strategic Outsourcing

2008

The production of a good or service frequently requires that the supplier performs a wide range of activities. The coordination between those activities implies that the firm must determine its boundaries, which means that it must define the supply chain activities that ...

Outsourced Services and ‘Imbalanced’ Supply Markets

European Management Journal, 2006

In the UK public sector, procurement decisions for outsourced services are usually taken at a local level, for example by a hospital trust or a local government authority. Cumulatively, these fragmented decisions can lead to 'imbalanced' supply markets (too few or too many suppliers), to the detriment of both suppliers and purchasers. This paper considers what can be done to manage imbalanced supply markets resulting from the fragmented procurement of outsourced services across a sector, using the case of the English National Health Service. The types and levels of action available within the health sector are explored.

Outsourcing structures and information flow in a three-tier supply chain

International Journal of Production Economics, 2010

We consider a three-tier supply chain consisting of an original equipment manufacturer (OEM), a contract manufacturer (CM) and a supplier. We analyze and compare three outsourcing structures that are currently implemented by top-tier OEMs: (1) inhouse consignment, under which the OEM signs independent contracts with the CM and the supplier; (2) turnkey with integration, under which the OEM contracts with an alliance of the CM and the supplier; and (3) turnkey, under which the OEM contracts with the CM, and the CM then subcontracts with the supplier. The OEM is a Stackelberg leader who decides how much of the end product to produce. All parties use take-it-or-leave-it wholesaleprice contracts. Both the CM and the supplier have private information about their own production costs. The OEM has prior information about these costs, but this prior information depends on the specific outsourcing structure. Each party's optimal decision is characterized. We then compare each party's profits across the three outsourcing structures and identify which benefits and when.

An Experimental Investigation of Outsourcing through Competition

Our research uses laboratory experiments to examine the theoretical results of competition between suppliers in an outsourcing setup. We consider a supply chain in which a single buyer needs to outsource the manufacturing of a product among N potential suppliers. The buyer allocates demand to suppliers not on the basis of price, but rather on service. We analyze the levels of service suppliers will decide to provide when competing on three different criteria specified by the buyer. For the first, suppliers compete by providing the buyer a specific service level (fill-rate), and for the second by maintaining a specific quantity of on-hand inventory. For the third criteria, suppliers compete based on a parameter designed to optimize the supply chain in favor of the buyer. Prior research and existing theory predict that the decisions will reach stability at the Nash equilibrium for all three types of competition. Theory also predicts these equilibrium points will be ordered, from competitions based on service level as the lowest and those based on the optimal criteria as the highest. Our experimental results show that the equilibrium points reached by subjects are in fact ordered as theory predicts. However, there are large and statistically significant differences between those equilibrium points and the theoretical predictions. Using the Quantal Response Equilibrium (QRE) we show that random errors can explain some of these discrepancies. Our analyses also suggest that, under optimal criteria for competition, other behavioral factors such as rival chasing and loss aversion can play an influential role.