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Should purchasing activities be outsourced along with production?
Fiona X. Yang1; Rachel Q. Zhang2; Kaijie Zhu3
Source PublicationEuropean Journal of Operational Research

When outsourcing its production to a contract manufacturer, a brand name company may also let the manufacturer take over the procurement of raw materials so as to focus on core competencies. However, by outsourcing the purchasing function, the brand name company may lose control over the quality of purchased materials, which may in turn damage its brand name and market share. In this paper, we study ways by which a brand name company can control the input material quality when outsourcing its procurement activities. Specifically, we consider a supply chain consisting of one brand name company, one contract manufacturer and a pool of material suppliers, each associated with a distinct quality level. The prices that the brand name company and the contract manufacturer are able to obtain from the suppliers depend on their bargaining power which may be private information. We show that a well designed procurement outsourcing contract can motivate the contract manufacturer to select higher quality materials. We also propose a material inspection strategy for fraud prevention and quality assurance in procurement outsourcing. Finally, we discuss the possibility of the brand name company ceding contracting rights to the contract manufacturer.

KeywordSupply Chain Management Outsourcing Quality Contract Manufacturing Procurement
Indexed BySSCI
WOS Research AreaBusiness & Economics ; Operations Research & Management Science
WOS SubjectManagement ; Operations Research & Management Science
WOS IDWOS:000388776500010
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Cited Times [WOS]:6   [WOS Record]     [Related Records in WOS]
Document TypeJournal article
Corresponding AuthorKaijie Zhu
Affiliation1.Tourism College, Institute for Tourism Studies, Colina de Mong-Há, Macao
2.Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
3.Department of Decision Sciences and Managerial Economics, Faculty of Business Administration, Chinese University of Hong Kong, Shatin, N. T., Hong Kong
Corresponding Author AffilicationFaculty of Business Administration
Recommended Citation
GB/T 7714
Fiona X. Yang,Rachel Q. Zhang,Kaijie Zhu. Should purchasing activities be outsourced along with production?[J]. European Journal of Operational Research,2017,257(2):468-482.
APA Fiona X. Yang,Rachel Q. Zhang,&Kaijie Zhu.(2017).Should purchasing activities be outsourced along with production?.European Journal of Operational Research,257(2),468-482.
MLA Fiona X. Yang,et al."Should purchasing activities be outsourced along with production?".European Journal of Operational Research 257.2(2017):468-482.
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