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The Use of Intermediate Sourcing Strategies

AUTHORS

Kirk C. Heriot

is associate professor of business administration at North Georgia

College & State University in Dahlonega, Georgia.

Subodh P. Kulkarni

is assistant professor of management in the School of Business at

Howard University in Washington, D.C.

Much of the existing literature discusses vertical inte- gration and competitive spot bidding as sourcing strategy choices, but often neglects intermediate sourcing strategies, such as taper integration and long-term supplier relationships. This exploratory

study examines the extent to SUMMARY which firms use intermediate

sourcing strategies, as opposed to the polar strategies, and attempts to improve our understanding of the sourcing choices available to manufacturing firms. Results from.a sample of 209 plant managers indicate that firms use taper integra- tion and long-term supplier relationships more fre- quently than vertical integration and competitive spot bidding. Further, the choice of a sourcing strategy was found to be dependent on the industry.

The Journal of Supply Chain Management A Global Review of Purchasing and Supply Copyright ( February 2001, by the National Association of Purchasing Management, Inc.

INTRODUCTION A firn's sourcing decisions involve the choice of securing

inputs to its operations. The sourcing decision is variously termed the "market-hierarchy choice," "vertical integra- tion," or the "make-or-buy" decision. At the extreme, a -fin may choose to completely outsource or completely internalize its production.

Market (outsourcing) and hierarchy (vertical integra- tion) are, however, endpoints of a continuum of sourcing strategies. Some of the intermediate sourcing strategies incdude taper integration and long-term cooperative rela- tionships (Landeros and Monczka 1989). Much of the existing literature focuses on the "bipolar" choice of out- sourcing and vertical integration (Williamson 1985). Traditionally, the selection of a sourcing strategy involves a static comparison of the costs of outsourcing and ver- tical integration with not much consideration for the intermediate strategies.

Recently, Hennart (1993) asserted that firms are more likely to select intermediate sourcing strategies than out- sourcing or vertical integration. However, there is little empirical evidence that the distribution of sourcing strategies differs across firms. If firns overwhelmingly used either outsourcing or vertical integration, it would mean that the sourcing decision is essentially limited to these two choices. On the other hand, a significant occur- rence of intermediate sourcing strategies may indicate that managers need to broaden their strategic repertoire.

Hennart (1993) stated that the criteria for the selection of intermediate sourcing strategies are not ciear. Tradition- ally, researchers have used a "comparative-static" approach to evaluate the choice of sourcing strategies (e.g., Wllliamson 1985). This usually involves a simultaneous comparison of the costs of outsourcing and vertical integration, over- looking the intermediate strategies. Given the relative lack of theory in this area, there is a need for exploratory studies that examine whether the distribution of sourcing strategies is different across firms. Exploratory studies generally form the first important step in theory devel- opment (Schendel and Hofer 1979).

The primary purpose of this article is to identify the extent to which manufacturing firms use various

18 The Journal of Supply Chain Management I Winter 2001

Authors' note: The authors' names are listed in alphabetical order.

.- ' -1 4 ; 1 ~ ;, ': ;, '1 ! , H lt q- ' F ' . The Use of Internnediate Sourcing Strategies - \ i- Y"f-i eA,^ff

intennediate sourcing strategies. The selection of an as sourcing alternatives. Barter. denotes a purchase of appropriate sourcing-strategy can be important for a goods (dr services) by a finm in exchange for the goods fiEm's competitive advantage when the sourcing strategy or services of another. This type of sourcing strategy is-"aligned" with the underlying costs (Hayes and Wheel- often offers.substantial tax advantages (Malitz 1998). wright-1984; also see Willliamson.1991a). This.article does- Countertrade arrangements often involve firms from dif- not discuss when intermediate strategies (as opposed to ferent countries. The importing firm can use a number the "bipolar" strategies) can generate a competitive' *of different types of assets to repay exporters depending advantage. However;-it is conceivable that managers on the type of project, including goods and services, may overlook the intermediate strategies because of (Forker 1997). Sole sourcing involves a contractual rela- their limited knowledge'of sourcing choices, thereby. tionship with one supplier. Multiple sourcing; on the -jeopardizing a,firmn's competitive advantage. Therefore, other hand, involves dealing with a number of suppliers. . - it is important to know whether, and to what extent, This offers a firm protection against opp6rtunistic.sup- managers have a strategic choice other than-vertical pliers (Richardson 1993). ; - integration and outsourcing. , - -

The remainder of this article is organized as foliows. THEORETICAL BACKGROUND - Tirst,-the types of sourcing decisions are briefly described. Transaction Cost Economics - Second, the theory underlying the choice of a sourcing Transaction cost economics (TCE) .has emerged as a . strategy is examined. Third, the frequency of sourcing theory that explains the choice of a asourcirg strategy

-decisions is investigated empirically. Finally, conclusions (Coase 1937; Williamson 1975, 1985). TCE corisiders - and implications of.the research are discussed-. the behavioral implications of the econormic actors -

TYPESO OURCING TRATEE . '. -involved in sourcing decisions. Transaction costs, or. -.: the costs of drafting, negotiating, monitoring, and. .

.A firm's sourcing strategies may include-vertical inte- enforcing asourcing contract, increase because-of the gration, taper integiation, long-term cooperative rela- .~bounded rationlality and opportunism on the.part of tionships, and competitive spot biddink (Landeros anda p~~ 1989) . . a ~~~~~~~~~firin'~ mianagers and suppliers. Bounided rationality-'

Mmeans that managers are intendedly rational, but only Vertical integration is the combination of technologi- 'Iimitedly so (Simon 1961). Opportunism means self-

cally distinct production, distribution, selling, and/or - interest s wt mson 1985). . -- - other economic processes within the confines of a single . Transaction costs are largely influenced'bythree tans- firm. ItJis also a dedsion to use internal or administrative action-parameters: asset specificty, uncertainty and the mechanisrms -the hierarchy as Williamson (1975) noted, - frequency of transaction. Asset specfaty refers to the (lack rather than market transactions, to secure nee&d inputs. of ease with which the human ca Vertical integration requires that a fudndamental commit- ical assets, and es petal (employe phys- ment be made to produce items in-house. fclt pcfclyte otemnfc

ment be.made to produceitemsin-ture of an item.can.be:used by alternative users or put Taper integration is a combination of vertical;integra- to alternative uses. Transaction-specific assets'lock trans- ' '

.tion and spot-bid contracts. It.means that a firm buys, acting parties into a bilaterally dependent -relationship, a particular input from outside suppliers in addition to thereby increasing transactionicosts. Similarly, recumring making it in-house (Harrigan.1984). Taper integration transactions are subject to-frequent haggling'with'sup- requires a firn to manage its own production of the input, pliers'. Asset specificity is perhaps the most important. and maintain a relationship with an outside supplier. - parameter that inifluences transaction costs (Williamson ".

Long-term cooperative;relationships sometimes involve 1985). Unpredictability or uncertainty in.the behavior of a form of "credible comritment" on the part of a firm -transacting parties; also raises transaction costs because and a supplier.'For example, a supplier may.make a :transacting:parties.need to safeguard the contract in uncer- financial commitment to supply parts over an extended tain situations. - .i . . . . time period., . -- '' . :.'-- - Williamson (i985) stated that it may not be necessary,

A firmil may secure inputs by turning to market -- to estimate the transaction costs of vertical integiation mechanisms, usually.in the form of a.spot-bid contract and outsourcing. It is usuallyzsufficient to merely compare' (Williamson 1975). A spbt-bid contract represents -a legal 'these costs at a given time (i.e., in a-"compaiative-static". .- agreement between a buyer and a seller to engage in an fashion). Managers choose between vertical integration economic exchange within the parameters established and outsourcing-deperidihg on which economizes on ' - in- a written document over a specified time period. the transaction costs. For example, firns with specialized Typically,:a spot-bid contract is completed after one or resourcesimay findit more efficient to integrate vertically,_ .more firms successfully bid for the right to engage in anv whereas those,with unspecializedresources may opt f6r;- economic exchange. - - . outsourcing. - . -' C. r -. *

Besides the strategies described above, -firmsmay use - , - . barter, countertrade, sole sourcing, and; multiple souicing' .

; . ' .-. i ' -i. :.;:: ::; .. -0-: ,,, The Journal ofSupply Chain ManagementI Winter.2001 19

7he Use of Intermediate Souirng Strategies

Research Questions Traditionally, TCE offers an explanation for the choice of

vertical integration, as opposed to outsourcing. However, the criteria for the selection of intermediate sourcing strate- gies are not clear. Hill, Hwang, and Kim (1990) argued that TCE views a transaction in isolation (e.g., to integrate vertically or not). Therefore, it usually does not allow all transactions to be compared simultaneously. Although some researchers (e.g., Williamson 1991b) have attempted to address these shortcomings, the existing research does not offer concrete guidelines for the choice of intermediate sourcing strategies. Following the spirit of exploratory studies, several "research questions" are outlined in this article instead of developing "hypotheses" (e.g., Schendel and Hofer 1979; Garvin 1986). Next, the rationale under- lying the research questions is outlined.

Anecdotal evidence suggests that a firn's choice of sourcing strategy is not limited to vertical integration and outsourcing, but also includes intermediate sourcing strategies. As an example, taper integration is considered to reduce the threat of opportunistic suppliers (e.g., Harrigan 1983). Alternatively, long-term cooperative relationships can also help an organization to foster a trusting relationship with suppliers and counter oppor- tunism to some extent. Therefore, in principle, a fimn that aims to reduce the threat of supplier opportunism can choose among vertical integration, taper integration, and long-term cooperative relationships.

A firm with unspecialized assets may find it more effi- cient to outsource than to integrate vertically. However, taper integration and long-term cooperative relation- ships can also serve as substitutes for outsourcing. It is not clear a priori why firms choose the intermediate sourcing strategies, as opposed to the polar strategies, based on the TCE rationale alone.

Question 1: Are firms equally likely to select intermediate sourcing strategies and polar sourcing strategies?

Among the intermediate sourcing strategies, the criteria for the selection of taper integration and long-term coop- erative relationships are not clear. Ring and Van de Ven (1992) stated that a number of firms are adopting coopera- tive supplier relationships m favor of adversarial strategies. In particular, cooperative supply arrangements, such as Just-In-Time, are reportedly becoming more widespread among industrial firms. The trust (or the relative lack of opportunism) between a firm and its supplier, fostered in a cooperative supply arrangement, reduces the transaction costs and results in a competitive advantage-in the long run.

Presumably, a firm can select taper integration instead of a long-term cooperative relationship. Taper integra- tion also requires a greater degree of trust between a firm and its supplier than an adversarial strategy such as competitive spot bidding. Therefore, both taper integra- tion and long-term cooperative relationships provide an altemative to competitive spot bidding.

Question 2: Are firms equally likely to use taper integration and long-term supplier relationships, when choosing an intermediate sourcing strategy?

The industry in which a firm operates may be one of the factors that influence a firm's choice of sourcing strategy. For example, an industry that is characterized by general-purpose, nonspecialized assets is likely to be asso- ciated with low levels of transaction costs (Williamson 1985). This is because a firm can easily obtain inputs through alternative means, should a supplier act oppor- tunistically. Sometimes, firms develop industry-specific assets through production networks. Production networks among firms often build trust among the players and lower the transaction costs of outsourcing (Carney 1998).

Question 3: Does the type of industry signifi- cantly influence a firm's sourcing strategy?

METHOD

Survey Design and Sample A questionnaire was developed as part of a larger study

of sourcing strategies. It was mailed to plant managers in 1,000 Southeastern manufacturing facilities. Nine hun- dred eighty-three plant manager names and addresses were used from a list provided by American Business Lists (ABL). An additional 17 had to be drawn at random from the 1995 Industrial Directory because some plants on the ABL list had a policy of not responding to sur- veys. Only two surveys from the original mailing were not deliverable. These two companies were eliminated and replaced with two other companies from the 1995 Industrial Directory to ensure 1,000 companies on the mailing list.

A modified version of Dillman's Total Design Method (Dillman 1978) was used to develop the instrument, pretest the instrument with plant managers and strategic management scholars, mail the instrument, and follow up on non-respondents. Ten business school faculty members and doctoral students were asked to assess the face and content validity of the survey items (Stone 1978). The resulting instrument was then pretested by 10 plant managers in a cross-section of industries. These interviews yielded useful suggestions to strengthen the face and content validity of the instrument. In each interview, the plant manager was given a cover letter and survey. The managers were asked to read the cover letter and complete the survey in the presence of the researchers. The managers' actions were observed to detect any delays or indications of concern or confusion on their part. In the event they seemed concemed or confused, clarifications were offered. Feedback was obtained from nine plant managers in nine different industries. A tenth manager declined to participate due to competitive pressures.

20 The Journal of Supply Chain Management I Winter 2001

The Use of Intermediate Souraing Strategies

Tollowing Dillman (1978), several techniques were used on a nominal scale.'Table I also shows the cumulative to increase the response rate. .Three follow-ups were mailed relative frequency distribution for the employee and after the initial mailing of the instrument: I . 'sales categones.The employee size of the plants ranged

* A postcard was sent one week after mailing the from 20 to .4,999. Sixty-one percent of the' plants 'had survey to thank those who had returned the employees'fewer than 250. Sales ranged from.$2.5 mil- survey and to remind those who had not.- lion to $1 billion. Sixty-seven percent of the plants had

* A letter, and questionnaire was'sent three weeks sales less than $50 million. The plants were located in after the initial mailing to non-respondents. seven'Southeastem states.

* A letter and questionnaire was mailed seven weeks Out of the 209 respondents, .164 were plant managers. after the original mailing to -non-respondents.' - Thirty-nine indicated that they worked in a closely related

Two hundred nine plant managers refurned a com- ' functional area such as purchasing, materials management, plete survey. This resulted in an initial response rate of 'or operations management. Only six indicated that they 21 percent. This rate is comparable to other studies of were not plant managers or a closely related functional sourcing strategy (e.g., Narasimhan and Carter 1998). exPert. To ensure that there was -no bias in the sample, a com- Table II shows the distribution of firms based upon parison of respondents to non-respondents was made two-digit SIC. To' determine if the returmed surveys rep- using the chi-square test. The comparison was made across resented a random subset of the initial mailing; the .(1) industry type, (2) number of employees, (3) sales, and respondents were classified by two-digit SIC.' This classi- X(4) geographical location. The chi-square'tests did not ' fication permitted a comparison to the 1,000 plants in reveal any-significant differences between respondents the original mailing. A chi-square test revealed no sig- and non-respondents.along these categories. Similarly, nificant response bias by SIC with respect to the distrib- chi-square tests revealed no significant differences between ution of surveys returned. early and late respondents in the.above categories. . . -

Seventy surveys were mailed to respondents a second time to analyze test-retest reliability (Stone:1978). The retesting was done three to four weeks after.the first questionnaires were received from respondents. This choice reduced the chance of overestimating the relia-- bility. Thirty-eight usable surveys were retumed. The percentage of surveys that showed no difference between' the first and the second response was 71 percent for Question 1 and 79 percent for Question 2.

Measures '- The sourcing strategy was measured by asking two

questions (see Appendix A). The first two choices to Question 1 measure vertical integration. The third and fourth choices measure taper integration, -whereas the fifth choice measures competitive bidding. The second .question asks about long-term supplier relationships and provides an additional measure of competitive bidding. Industry type was coded using a two-digit Standard Industrial Classification (SIC). The SIC for each company was provided with the mailing list from.ABL.

* - The specific terminology for the survey questions was carefully pretested with management.faculty, doctoral students, and 10 plant managers who completed the survey in the presence of the researchers. This-was done to make sure that'the four strategies were clearly distin- guishable to each respondent and corresponded to the four sourcing strategies developed for this research.

RESULTS Table I shows the descripthie statistics. Because of the,

confidentiality of data at the plant level, ABL provides, information about sales and the number of employees

Table III categorizes the responses according'to the sourcing strategy categories. Table.1V summarizes'the results of chi-square tests on these data.

*The data in Table IV(A).help to address Questi6n 1. The chi-square test of a muitmomial experiment suggests a sig- nificant difference between the predicted and actual-pro- portions of sourcing strategies (p = 0.001). Left to chance, one would expect the four strategies to occur in equal pro- portions:- However, the cli-square test revealed that the firms did not use the four sourcing,strategies in equal pro-' portions. Furthermore, the intermediate sourcing strategies constituted the majority of sourcing strategies.

Table IV(B) addresses Question 2. If the firms selected intermediate strategies randomly,they would be equally

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DESCRIPTIVE STATISTICS

Number of Employees Sales ' Location Cat Frq (Crf) ' Cat. Frq (Crf) :State Frq (Rf) 20-49 *2 (0.00) - 2.5-5 mil 2 (0.00) 1 ' 19 (0.09) 50-99 38 (0:19) 5-10 'mil - 26 (0.13) 2 77 (0.37) 100-249 89 (0.61) -10-20 mil -47 (0.35) 3 32 (0.15) 250-499 48 (0.84) 20-50 mil 65 (0.67) 4 22 (0.11) 500-999 22 (0.95) 50-1 00 mil 38 (0.85) 5.- 9 (0.04) 1,000-4,99.9 ,10.(1.00) 100-500 rnil .30 (0.99) 6.; 32 (0.15)'

'500 mil-1 bil 1 (1.00) 7 18 (0.09)

Note: Cat= categories,'Frq = frequency, Crf = cumulative relative frequency, Rf = relative frequency ' ' -

The Joumdl of Supply Chain Management Winter 2001 21

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7he Use of Interrnediate Sourcing Strategies

Table II

COMPARISON OF THE RETURNED SURVEYS TO THE MAILING LIST BY SIC

SIC

20 21

25 26 27 28 29 30 31

33 34

38 39

Respondents n = 211

21 3

6 7

3 0

Mailing List n= 1,000

177

141 49

26 64 7

71 6

37 62

XI = 25.07 not significant at p = 0.05.

Table III

SOURCING STRATEGIES

Strategy

Vertical Integration

Taper Integration

Long-Term Cooperative Competitive Spot-Bid

Frequency Percent of Total

121

13.9

57.9

18.2

10.1

Rank

2 4

likely to choose taper integration or long-term supplier relationships. However, the chi-square test indicated that there was a significant difference between the actual and predicted proportions of the two intermediate sourcing strategies (p = 0.001).

The above results suggest that a firm's choice of a sourcing strategy may depend on some strategic vari- able(s), other than chance. As stated in Question 3, it is suspected that the choice of sourcing strategy may depend on the industry, among other variables. Table V(A) shows

the distribution of sourcing strategies according to the two-digit SIC.

The chi-square test usually requires a large number of responses in each individual cell. SICs 20 through 29 are typically associated with commodity-like products (e.g., lumber, greige cloth, and other products). On the other hand, SICs 30-40 are typically associated with products that are differentiated by the manufacturer (Hayes and Wheelwright 1984). Therefore, the responses for SICs 20-29 were aggregated into one category and the responses for SICs 30-40 into another.

Following the guidelines for a chi-square test of a multi- nomial experiment, the expected frequency distribution of sourcing strategies was calculated using the data in Table V(B). The chi-square test revealed significant differences in the sourcing strategy distribution between the two types of industries (p = 0.10). This suggests a possible influence of the industry type on a finn's selection of sourcing strategy. The likelihood-ratio chi-square statistic (G2), another measure of association between the industry type and the sourcing strategy (see Fienberg 1977 for further details), was also calculated. This statistic (G2 = 7.2) was also significant at p = 0.10.

The effects of plant sales and geographical location on the sourcing strategy were also investigated. The Spearman rank correlation of the sourcing strategy with plant sales was -0.09 (insignificant at p = 0.10). The chi-square test did not indicate any significant association (at p = 0.10) between the sourcing strategy and plant sales or geograph- ical location.

The relationship between sourcing strategy and number of employees was tested next. There was a significant Spearman rank correlation (-0.19, p < 0.05) between number of employees and sourcing strategy. To further investigate this relationship, the sourcing strategy variable was regressed on the industry type along with number of employees, sales, and location. The sourcing strategy vari- able, although ordinally scaled, was treated as a categor- ical variable to avoid the requirement that the categories be "equally spaced" (Lunneborg 1994). Sometimes, the proportional odds model, a variation of the multinomial logit model, is recommended for the ordered categories response variable (McCullagh and Nelder 1989). The pro- portional odds model offers an intuitively better explana- tion of the odds of success for different categories. However, the purpose was not to estimate the odds of success for one sourcing strategy category, as opposed to another, but to investigate the effect of industry type on sourcing strategy in the presence of control variables. Therefore, the maximum likelihood multinomial logistic regression was used. Table VI sunmnarizes the results of this procedure.

Because the sourcing strategy has four categories, there are three (4 -1 = 3) logits. Logits 1, 2, and 3 compare the odds of selecting vertical integration, taper integration, and longterm supplier relationships, respectively, with

22 The Journal of Supply Chain Management I Winter 2001

the odds of selecting a cormPetitie bidding strategy. Table VI(A) shows the global significance of the independent. variables -in all logits simutltaneously. The overall model was significant (p-< 0.05), as indicated by the global clii- square statistiCX= 42.SS). Thevariables industry.type and-number of employees were significant (p < 0.10-ahdb p < 0.05, respectively) in atleast one of the logits.

The industry type (SIC) was significant (p <-0.10) in the logit that compares the oddso6fselecting taperilnte-' gratioh with those of selecting a competitive biddint g- strategy.nThe number of employees was significant (p < 0.05)Jn the lo gi t that comp ares the odds of selecting the vertical integration strategy (p < 0.05) and-the taper. integration strategy (p <-0.05) with those of'selecting a, compehitive bidding strategy.

DISCUSSION - - The statistical evidence regarding the first research

questioni suggests that firnsA use intermediate sourcing. strategies more frequentlythan the "polar"strategies, (i.e., vertical integration and outsourcing). This finding:

-cannot be satisfactorily explained on the basis of the TCE rationaie alone. If firns indeed econornized only.on transaction costs, then one would expect firms to select mostly-vertical integration and competitive spot bidding strategies. This finding tentatively supports Hennart's -(1993) assertion that firns are more likely to select intermediate sourcing strategies than polar strategies. Following Hennart's rationale, the results suggest that firns choose sourcing strategies so as -to economize on multiple types of costs, riot just transaction costs. -

Besides transaction costs,production costs also influence the choice of a sourcing strategy (e.g.* Harrigan 1984). Production costs are the costs associated with the.input,; throughput, -and output stages of production. These - include the prices 'of labor, material, energy, and land, as well as the costs of input processing. Mohan and Berkowitz (1988)noted that raw materials alone account for 60 to 70-percent of the production costs for a steel manufacturer. Because purchased inputs are such a large portion of total product cost,.the makeor-buy decisions' are often.based on production cost.considerations (Welch and Nayak 1992). -

There is anecdotal evidence that intermediate strategies, such as taper.integration and long-term contracting, - often involve transaction cost and production cost con- siderations. T6r example; a-firm's taper integration strategy involves-moderately-high costs of production. However, it helps to control opportunistic suppliers and economizes on the attendant.transaction-costs (Harrigan 1983). Long- term supplier relationships expose'a firm to the hazard of' opportunistic suppliers, but.they may'help to economize on production'costs (Sweetrian 1996).

Consider the following continuum of sourcing strate- gies: vertical integration, taper integration; long-term cooperative relationships, and competitive spot bidding.

Transaction costs increase monotonically from the vertical

The Use of Intermediate Sourcing Strategies

Table IV

CHI-SQUARE TESTS

(A) Chi-Square Testfor Sourcing Strategy Distribution

Predicted, Actual Strategiy pi- ' P

Vertical .Integration

Taper Integration

Long-Term C6operative'- * -

Competitive Spot-Bid -

roportion '

0.25

.0.25

0.25 I

- Proportion

' 0,139

0.579 - - _L _ - *,.....;

0.182

0.101

XI = 86.00 significant at p 0.001; n =-209.

(B) .Chi-Square Test for Intermediate Sourcing Strategy Distribution

-Strategy

Taper Integration

I . _- Predited " . - i l ' Proportion ;

0.50 --

-Long-Term Cooperative 0.50

%2 = 43.32 sianificant at p = 0.001; n = 159.

* Actual - Proportion

0:761'

0.:239

I~~~~~~~~ I *- I * : . - -. 1 . i ,~

e: The.actual'proportions in Tables IV(A) and IV(B) are.calculated using the ueny distribution in'Table 111. -

integration strategy to competitive spot bidding. Production costs are.considerably higher in the' vertical integration strategy than in other sourcing strategies because it cre- ates exit barriers that trap firms into using obsolescent

* technologies.(D'Aveni and Ravenscraft 1994). Further, - production costs may be increased by underutilization ; of capacity in some stages of production (Harrigan 1983).

iTherefore,- production c6sts decrease.monotonically from the vertical integration strategy to competitive spot'bidding.-

- The sum of transaction costs and production costs may . .be a'U-shaped curve that "bottoms out" in the interme-

diate range of sourcing strategies. As a result, a firm that -economizes-on both transaction costs and production costs is mbre likely to choose:intermediate sourcing strate- gies. The findings are consistent with-this explanation..

The second research question concens the choice among intermediate sourcing strategies. The findings suggest that firms choose a particular intermediate sourcing strategy consciously instead of selecting one randomly. This also implies that a finm's choice am6ng intermediate sourcing

- strategies -is not ranidom. - - -

The third research questioh addresses the influence of industry type on.the selection of a sourcing strategy. Specifically, two types,of industry were considered: unspecialized (i.e., commfiodity-like rioducts) and spe- cialized goods manufacturers. The findings indicate that the sourcing strategy distribution was significantly dif- ferent for the specialized and unspecialized industries. The sourcing strategy. choice was significantly associated

; with,the industry typeleven after controlling the number of-employees. - -

Theoumalof Supply Chain'Management Winter 2001 23

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The Use of Intermediate Souring Strategies

Table V

DEPENDENCE OF SOURCING STRATEGY ON INDUSTRY

(A) Sourcing Strategy Distribution According to Industry Type

Sourcing Strategy Standard Industrial Long-Term Competitive Classification Vertical Taper Cooperative Spot-Bid (SIC) Integration Integration Relationship Contract

20 2 5 1 2

22 7 15 12 4

23 4 12 1 2

24 2 4 3 0

25 0 10 0 0

26 2 5 1 3

27 1 2 5 1

28 1 12 5 3

29 1 1 1 0

30 0 6 3 1

31 0 0 0 2

32 0 3 2 0

33 2 2 1 2

34 1 12 1 0

35 3 10 1 1

36 1 14 0 0

37 2 5 1 0

38 0 3 0 0

Total 29 121 38 21

(B) Chi-Square Test for Association of Sourcing Strategy with Industry Type Sourcing Strategy

Long-Term Full Taper Supplier Competitive

SIC Integration Integration Relationship Bidding

20 66

9 55

XI 7.56 significant at p = 0.10.

Furthermore, industries with unspecialized products showed a significantly higher incidence of competitive bid- ding and long-term supplier relationships, as opposed to taper and vertical integration. On the other hand, industries with specialized products showed a significantly higher inci- dence of vertical and taper integration, compared with long-term supplier relationships and competitive bidding

A tentative explanation for the above finding is the following. Industries that manufacture specialized prod- ucts often experience high levels of transaction costs

(Williamson 1985). Therefore, these firms are more likely to integrate fully or use taper integration to avoid being subject to supplier opportunism. The manufac- turers of unspecialized products are less likely to experi- ence supplier opportunism. Therefore, production costs are perhaps more likely to be a deciding factor in the choice of a sourcing strategy in unspecialized industries. The outsourcing and long-term supplier relationship strategies may help the unspecialized manufacturers to economize on production costs.

CONCLUSION This study investigates the frequency of use of sourcing

strategies among a sample of 209 manufacturing firms in the Southeastem United States. The study's purpose was to evaluate the extent to which firms use intermediate sourcing strategies, such as taper integration and long- term supplier relationships, as opposed to the polar strate- gies of vertical integration and competitive spot bidding. The findings suggest that firms use intermediate sourcing strategies more frequently than the polar strategies. They also suggest that firms choose a particular intermediate sourdng strategy consciously and not randomly. Further, the distribution of sourcing strategy differs significantly across industries. The specialized goods manufacturers used vertical and taper integration more frequently than long-term supplier relationships and competitive spot bidding. On the other hand, the unspecialized manufac- turers used long-term supplier relationships and competi- tive spot bidding more frequently than taper and vertical integration.

Much of the existing literature on sourcing strategies focuses on the polar sourcing strategies. This can mislead managers and researchers to conclude that firms usually choose between vertical integration and competitive spot bidding to the neglect of intermediate sourcing strategies. The results of this study suggest the opposite. The study also tentatively supports Hennart's (1993) proposition that intermediate sourcing strategies may constitute a "swollen middle." It appears that firms may choose a sourcing strategy in order to economize on both transaction costs and production costs.

Taper integration has received very little attention in the literature. Hopefully, this study will lead to exploration of the determiinants of taper integration and other interme- diate sourcing strategies.

This study is an exploratory investigation into the use of intermediate sourcing strategies by manufacturing firms. Exploratory studies generally provide a starting point where there is relative lack of theory. Therefore, they are also subject to several limitations. The explana- tions advanced while addressing the research questions in this study should be viewed as tentative, given the exploratory nature of the study. In the future, researchers may build on the existing theoretical foundation and generate testable hypotheses.

24 The Journal of Supply Chain Managetnent I Winter 2001

20-29

30-40

The Use of Intermediate Sourcing Strategies

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'able'VI -L I '

RESULTS OF MULTINOMIAL.LOGISTIC REGRESSION I~~~~~~~~~~~~~~~~~~ t: , t .' .

(A) Maximum Likelihood Analysis of Variance Table

Dependent Variable:,Sourcing Strategy (STRAT) - - - , I- , -. i Chi-Square- -

I .' . .__ _ _ ' A O I -intercept SIC

I.- EMPL Likelihooc

4. 5.,

- I 6.20*

7.90** J Ratio 42.55**

(B) Maximum Likelihood Parameter Estimates

Intercept

1. .

- SIC

. .EMP.

Logit Coefficient

1 -2.07 '2 -0.99

3 -0.19 4 1' *0.O1'

- 2-

*0.55

-0.49 0.71; 0.62-

3 _ , 0:31

Chi-Square

2.61* 0.88

* 0.03 z

0.01 2.50* 0.60

,.5.42**

5-37** 1.05

Note: STRAT:rsourcinq strategy scored from 1 to 4; 1 vertical integration,

2 - taper integration, 3 long-term ielationship, 4 = competitive spot bidding.

*-SIC: incdustry type; SIC= 1,for:SIC 20-29, and 0 otherwise.

EMPL: number-of employees scored from 1 to 6 (smallest to largest); also see -Table I. -

p < 0.1 0;-** p < 0.05.

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~~_. 4 : : .-

The Joumal of Supply Chain Management l Winter 2001 25

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The Use of Intermediate Souring Strategies

Appendix I

SURVEY QUESTIONS

STRATEGIC SOURCING QUESTIONNAIRE

When thinking about.how to source inputs to your plant's production process, please consider one end product that is manufactured and sold by your company. Within the context of this scenario, also consider key parts, materials, components, and subassemblies (inputs) that are part of the end product you have chosen to con- sider. Consider both the end product and its key parts, materials, components, or subassemblies throughout the questionnaire.

Look at the following figure. Consider a single final product (labeled Y below) your plant currently makes. Write the name of that product in the space provided. Consider only this end item throughout the remainder of the survey.

Y:,

y End Product

X1 *X2 X3 X4 X5 Parts, materials, components, and subassemblies

Please consider Y, the end item that is made by your plant and sold to customers. In the following questions, we will use Y to refer to that particular end item.

Q-1 Does your company make any of the different components that are used to make Y? (Please circle one answer.)

1 All of the different components are made at the same plant that makes Y.

2 All of the different components are made by the company, but at different plants.

3 Some of the components are made at the same plant that makes Y, the rest are made by other companies.

4 Some of the components are made by the company, but at different plants, the rest are made by other companies.

5 None of the components for Y are made by the company, all are purchased outside.

6 Other (please explain):

Q-2 If some of the components for Y are purchased from external suppliers, do you use (please circle one answer):

1 Competitive bidding for key components.

2 Long-term relationships with suppliers for key components (for example, strategic alliances, Just-In-Time supply, strategic partnerships).

3 Some other sourcing arrangement (please explain).

26 The Joumal of Supply Chain Management I Winter 2001

TITLE: The use of intermediate sourcing strategies SOURCE: Journal of Supply Chain Management 37 no1 Wint 2001

WN: 0134906472004

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