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Sole sourcing, competitive sourcing, parallel sourcing: Mechanisms for supplier performance
Author(s) -
Richardson James,
Roumasset James
Publication year - 1995
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090160109
Subject(s) - strategic sourcing , industrial organization , business , supplier relationship management , competition (biology) , profit (economics) , incentive , quality (philosophy) , microeconomics , marketing , supply chain management , supply chain , economics , strategic planning , biology , ecology , philosophy , strategic financial management , epistemology
Quality management practitioners in the USA such as W. Edwards Deming, strongly advocate the Japanese model of supplier relationships‐recommending substantial specific investment in a single supplier for improved co‐ordination and higher quality. But the strategy literature and conventional wisdom favor multiple sourcing, suggesting that a high level of specific investment in a sole source will lead to problems with supplier performance. Using agency theory, we construct a model to evaluate the tradeoff between the costs to set up and coordinate with suppliers and the incentive for performance provided by competition. We find that the validity of Deming's Point Four, that sole sourcing is more profitable than competitive sourcing, depends on parameters such as profit sensitivity to supplier performance.