M&SOM Review

Global Sourcing How, What, Why>

Ever-increasing competition in global markets has forced many firms to outsource their non-core operations to focus on their core competencies. While the outsourcing benefits are clear, it may also bring new challenges on how to manage global sourcing. Two practical issues may arise when a buyer tries to assure supply in outsourcing. First, when devising a sourcing strategy, the buyer often does not have perfect information about the supplier’s cost structure; the supplier’s cost structure is highly confidential information because it conveys significant bargaining power when negotiating a contract with a buyer. Second, the suppliers’ actions may not be verifiable or enforceable. In particular, the contracted capacity may not be enforceable for a couple of reasons: First, capacity is a complex decision that involves many factors, including the supplier’s managerial effort; thus, when a supplier fails to deliver the promised quantity, it might be hard to verify whether this is due to underinvestment in effort or reasons beyond the supplier’s control. Second, if the cost of enforcement (e.g., the cost of capacity verification and the cost of a lawsuit) is prohibitively high, contract terms that penalize a dishonest supplier might not be credible. Due to lack of enforcement, the supplier may purposely deviate from the agreed capacity, making capacity investment a noncontractible decision.

The globalization trend has made both of these issues more prominent because of increased length and complexity of supply chains. For example, studies have shown that it is common that in global supply chains, buyers do not have precise information about the cost structure of their suppliers located overseas (Noordewier et al. 1990 and Hortacsu et al. 2009). Moreover, it is known that regulatory institutions and law enforcement are weak in emerging economies, which may give rise to contractibility issues due to higher contract enforcement costs (Antras 2015). The World Bank (2008) provides a comparison of the judicial system’s efficiency in resolving commercial disputes in different countries or regions. The report shows that developing countries are often associated with less efficient judicial systems (e.g., longer wait time, higher litigation fees, and more complex procedures), which present a major obstacle for these countries to attract foreign businesses and investments. According to a Deloitte survey, 70% of executives were extremely or very concerned about suppliers’ compliance risks in emerging markets (Sinha 2014).

Bolandifar, Feng, and Zhang (2016) study a buyer’s supply contracting problem under the presence of the above practical issues. It has been recommended by practitioners that without capacity enforceability, firms may tie their payment to actual accepted delivery, rather than the promised capacity (Pierce 2012). Bolandifar, Feng, and Zhang (2016) show that this recommendation can be quite effective in achieving the same results as when firms can enforce supplier’s capacity investment. That is, a carefully designed payment schedule based on the actual delivery quantity can substitute for contract terms that specify the supplier’s capacity investments.  In particular, under such a solution, the lack of capacity enforcement will not lead to additional profit loss caused by the asymmetric information about the supplier’s cost structure.

More importantly for practice, the authors find that the theoretically optimal contract would reduce to a simple two-part tariff under certain conditions. In other words, a single, linear contract based on the actual delivery quantity (sometimes just a wholesale price contract) could be optimal for the buyer. Even when it is not strictly optimal, extensive numerical analysis suggests that it can still provide near-optimal profit for the buyer. In addition, it has been found that the simple contracts usually increase supply chain profits, implying that these contracts might be desirable from both supply chain members’ standpoints.

How to contract to assure supply under the presence of information and enforcement issues? The research by Bolandifar, Feng, and Zhang (2016) provides a confirmative answer. The findings bode well for managers facing the above practical issues, especially in a global sourcing context: For both ease of implementation and excellent performance, a buyer can simply use a two-part tariff contract (or sometimes just a wholesale price contract) under the presence of cost information asymmetry and contractibility issues. Moreover, the results suggest that the buyer should try all means to reduce the uncertainty about the supplier’s cost structure, which could lead to significant losses both for the buyer and for the supply chain. This is because such uncertainty provides a robust protection of the information rent the buyer has to pay to the supplier; even the complex, optimal contract does not help much in reducing the information rent.



Antras P (2015) Global Production, Firms, Contracts, and Trade Structure (Princeton University Press, Princeton, NJ).

Bolandifar E, Feng TJ, Zhang F (2016) Simple Contracts to Assure Supply under Non-contractible Capacity and Asymmetric Cost Information. Manufacturing and Service Operations Management. Permalink: https://doi.org/10.1287./msom.2017.0628

Hortacsu A, Martinez-Jerez F, Douglas J (2009) The geography of trade in online transactions: Evidence from eBay and Mercado Libre. American Economic Journal: Microeconomics 1(1):53–74.

Noordewier TG, John G, Nevin J (1990) Performance Outcomes of Purchasing Arrangements in Industrial Buyer-Vendor Relationships. J. of Marketing 54(4):80–93

Pierce F (2012) How to Avoid Contract Trouble in China. (March 15), http://www.supplychaindigital.com/scm/how-avoid-contract-trouble-china.

Sinha S (2014) Creating a Culture of Compliance Across Your Supply Chain. (July 3), https://www.qualitydigest.com/inside/qualityinsider-article/creating-culture-compliance-across-your-supply -chain.html#.

World Bank, The (2008) Doing Business: Comparing Regulation in 181 Economies (World Bank Publications, Washington, DC).

Economies are at the forefront of a major innovation and transformation of supply chains in several industries including automotives, electronics/semiconductors, and life-sciences. Conventionally closed and commoditized supply chains are enjoying a new burst of innovation both in the structure and function – powered by innovative technology and intellectual property (IP) in the form of artificial intelligence, gene sequencing, and Internet of everything. In such technology supply chains, which are a major focus of this paper, a specialist upstream supplier, referred to as a technology supplier, invests in R&D to gain patents, copyrights, or other forms of IP. The technology IP is then licensed and embedded in products designed by one or more downstream companies; these products are then launched and distributed to the market.

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Companies often engage in alliances for the development and introduction of new products. These alliances play a particularly important role in the highly innovative, and lucrative, biopharmaceutical industry. The global sale of biopharmaceutical products has surpassed $1 trillion annually. Much of this value comes from on-patent new product introductions. Over half of all new product approvals are awarded to alliances.

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Gig-economy platforms like Uber, Lyft, Postmates, and Instacart have created marketplaces in which services are performed on-demand for consumers by independent service providers. This arrangement, referred to as “self-scheduling,” allows providers the flexibility to choose when, where, and how much they work. Furthermore, the platform requires no advance commitment from providers regarding their working pattern. Consequently, providers’ interest in working responds in real time to changes in the incentives offered by the platform.

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As Internet retailing grows, so does the complexity of the supply chains that support it. Initially many organizations utilized a handful of regional fulfillment centers (FCs) to serve customers’ online orders. Each FC was dedicated to a region, and operated independently of the other FCs. By ignoring interactions among FCs, firms could employ traditional inventory policies designed for decentralized distribution systems, policies that are half a century old.

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Let us first read a story written and posted on the thekrazycouponlady.com:

Like many Krazy Coupon Ladies, I consider myself a smart and savvy shopper, but I'll be the first to admit that sometimes my emotions get the best of me. I saw a beautiful cashmere sweater at one of my favorite shops last week for 30% off; it even came in petite sizes—it was too perfect. I thought I had an amazing deal. It was still more than I would normally spend, but I went against my gut and bought it anyway. The next day I got an email that they were now all 40% off—just my luck! Thankfully, while I was online I came across their price adjustment policy and got an additional $10 credited back to my card. Since I had such good luck with this, I thought I'd share a few other fabulous price adjustment policies so hopefully you can save more money and stress less this season! (The Krazy Coupon Lady 2016; emphasis added)

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As every savvy consumer knows, successful products are often quickly copied by lower-cost producers (copycats). This can be observed in a wide variety of manufactured items, from pharmaceuticals to electronics. These copycat firms piggyback on the success and creativity of others by quickly introducing their own facsimile of a much more expensive product. To combat the copycats, firms may turn to legal means. However, lawsuits are often difficult as the copycats skate the fine line between stealing designs and inspiration. In some cases, government protection in the form of patents can be helpful (for example, audio equipment manufacturer Klipsch has sued competitor Monoprice for patent infringement, and fashion firm Burberry includes legal action as one of its strategic initiatives). In other cases, a manufacturer may choose to compete on price, hoping that consumers will stay loyal in exchange for price concessions (for example, research has shown that two years after the introduction of a generic version of pharmaceuticals the cost of treatment falls by an average of 35.1%). In still other situations, the designer of an original product may be left to basically ignore the copycat for lack of effective options.

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From April 2017, large UK companies are required to report their supplier payment practices and performance twice a year, according to a new regulation of the Department for Business, Energy and Industrial Strategy (https://www.gov.uk/government). Firms must report detailed contractual terms such as the time they take to pay their invoices. And the United Kingdom is not the only country aiming to regulate firms’ payment behavior. France, for example, has passed a law that prevents French trucking firms from extending payment terms more than 30 days.

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Electric vehicles (EVs) have been considered an integral part of smart city development and offer a promising solution to environmental issues in transportation. EVs produce no tailpipe emissions and offer significant improvements on well-to-wheel energy efficiency and emissions levels over their gasoline counterparts, especially when powered by clean sources of electricity (e.g., solar and wind power). The diversity of power sources also make EVs less sensitive to fossil fuel depletion and to supply uncertainty of crude oil. Despite their potential, however, mass consumer adoption of EVs have been hampered by several major hurdles, including their short driving ranges (coupled with inadequate public charging facilities), their high upfront purchase costs, and their potentially high depreciation rates due to rapid technology development.

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