Make-or-buy service capacity decision in a supply chain providing after-sales service

Gang Li, Feng Feng Huang, Edwin Tai Chiu Cheng, Quan Zheng, Ping Ji

Research output: Journal article publicationJournal articleAcademic researchpeer-review

56 Citations (Scopus)


We consider a supply chain comprising a manufacturer and a retailer. The manufacturer supplies a product to the retailer, while the retailer sells the product bundled with after-sales service to consumers in a fully competitive market. The sales volume is affected by the retailer's service-level commitment. The retailer can build service capacity in-house at a deterministic price before service demand is realized, or buy the service from an outsourcing market at an uncertain price after service demand realization. We find that the outsourcing market encourages the retailer to make a higher level of service commitment, while prompting the manufacturer to reduce the wholesale price, resulting in more demand realization. We analyze how the expected cost of the service in the outsourcing market and the retailer's risk attitude affect the decisions of both parties. We derive the conditions under which the retailer is willing to build service capacity in-house and under which it will buy the service from the outsourcing market. Moreover, we find that the manufacturer's sharing with the retailer the cost to build service capacity improves the profits of both parties.
Original languageEnglish
Pages (from-to)377-388
Number of pages12
JournalEuropean Journal of Operational Research
Issue number2
Publication statusPublished - 1 Dec 2014


  • Capacity
  • Outsourcing
  • Service
  • Supply chain management

ASJC Scopus subject areas

  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

Cite this