Horizontal Subcontracting From Competitors: When and What?

Li Li, Li Jiang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

6 Citations (Scopus)

Abstract

We investigate horizontal subcontracting between two firms that compete in selling to uncertain markets. Each firm manages resources to make a key component indispensable for final assembly by both firms. A horizontal subcontract stipulates that one of them prepares key component or even produces final product for the other. The subcontract can be signed before or after resource preparation, which we refer to as forward and spot subcontracting, respectively. With the presence of demand uncertainty, the subcontract is signed before (after, resp.) demand realization in forward (spot, resp.) subcontracting, while resources are always prepared in advance. Forward subcontracting enables the firms to achieve the maximum overall cost saving by concentrating all production activities in the more cost-efficient firm. Spot subcontracting draws the firms to unilateral undertaking to prepare resources and cooperative resource allocation. This gives rise to an efficiency effect by balancing production and market selling between the firms, and a pooling effect that enables them to profit from synergies between markets. The subcontracting subject is crucial to the contribution of total cost saving relative to total revenue gain to the efficiency effect, but is inconsequential on the scale of the pooling effect. We conduct a comparative investigation into forward and spot subcontracting, with the subject playing a differentiating role, and explore the impacts of the means and variances of demand intercepts and the firms’ costs on system performance under various horizontal subcontracting modes differentiated by timing and subject.

Original languageEnglish
Pages (from-to)1320-1333
Number of pages14
JournalProduction and Operations Management
Volume27
Issue number7
DOIs
Publication statusPublished - Jul 2018

Keywords

  • competitor cooperation
  • horizontal subcontracting
  • make-and-buy strategy
  • make-or-buy strategy

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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