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The Influence of Cost and Quality Priorities on the Propensity to Outsource Production *
Author(s) -
Gray John V.,
Roth Aleda V.,
Tomlin Brian
Publication year - 2009
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.2009.00248.x
Subject(s) - outsourcing , industrial organization , business , production (economics) , quality (philosophy) , asset specificity , competition (biology) , quality costs , asset (computer security) , competitive advantage , empirical research , knowledge process outsourcing , marketing , operations management , economics , transaction cost , microeconomics , risk analysis (engineering) , computer science , cost control , finance , ecology , philosophy , computer security , epistemology , biology
Outsourcing of production has escalated over the past decade due to unprecedented competition and worldwide access to low‐cost labor markets. This article examines how cost and quality priorities—two key attributes of manufacturing strategy—influence a manufacturer's propensity to outsource. By doing so, we bridge the existing gap between research on manufacturing strategy and firm boundaries. We develop a theory‐based model that links a manufacturer's cost and quality priorities to its plans to outsource production. Our empirical analyses, based on survey data obtained from 867 manufacturing business units, control for firm‐specific factors previously shown to impact outsourcing, including asset specificity, uncertainty, and current capabilities in cost and quality. We found that the competitive priority placed on cost played an integral role in sourcing decisions, while, surprisingly, conformance quality priorities did not. The cost result is consistent with our expectations and observations in practice. The significant effect of cost priority on outsourcing shows that any theory of firm boundaries that fails to consider competitive priorities is incomplete. The finding regarding quality, which was counter to our expectations, may partially explain why there is an emergence of so many nonconforming products associated with outsourcing. Taken together, our results provide theoretical insights for future research into how manufacturing managers can improve their decision making on outsourcing production.