Concurrent sourcing: When do firms both make and buy?

Abstract

In this dissertation, I ask, When and why do firms simultaneously make and buy a particular input? I term this strategy concurrent sourcing. While extant theory typically treats the sourcing decision as a dichotomous choice, in practice firms can and do simultaneously make and buy the same input. Traditional reasons for this partial integration strategy involve hedging against volume uncertainty and gaining complementary knowledge. By including supplier's incentives, my work counters the hedging logic and unpacks the knowledge argument. The key benefits of concurrent sourcing include an improved ability to monitor suppliers due to reduced information asymmetries and increased learning due to the combination of deep tacit knowledge gained from internal production and more diverse knowledge gleaned from external sources. I posit that concurrent sourcing is a stable sourcing mode since making and buying can be synergistic activities under certain conditions. By combining a resource-based and transaction cost approach, I identify conditions that lead firms to choose among the three primary sourcing modes: making, buying, and concurrent sourcing. I empirically test my propositions by conducting a survey of production tooling and services sourcing decisions in North American metal forming firms. Analysis of this data confirmed the existence and stability of concurrent sourcing. Firms were more likely to concurrently source if their production costs were similar to those of their suppliers by having sufficient expertise and moderate scope economies from both internal and external suppliers. They also concurrently source in cases of high technological uncertainty, indicating the benefit of learning from both internal and external suppliers. Concurrent sourcing was also more evident if performance ambiguity was low, markets were thin, inputs were similar, and firms were unionized, suggesting quality monitoring advantages. These findings do not support the traditional argument that volume uncertainty motivates firms to choose this mode, but rather support the view that knowledge motivates firms to concurrently source. This research underscores the complexity of sourcing decisions and suggests that the concurrent sourcing option should be included when investigating make-or-buy choices.

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