The Effect of Learning on the Make/Buy Decision

27 Pages Posted: 4 Oct 2011

See all articles by Edward G. Anderson

Edward G. Anderson

University of Texas at Austin - Department of Information, Risk and Operations Management

Geoffrey Parker

Dartmouth College

Date Written: September 1, 2002

Abstract

By including the effects of learning over time on both the production of components and their integration into complete products, we develop an engineering-based model of outsourcing. This model provides an alternative explanation for much of what other outsourcing theories predict, as well as making several new predictions. In particular, we show that outsourcing decisions can create a path-dependent outsourcing trap in which a firm experiences higher long-run costs after an immediate cost benefit. We also describe conditions under which outsourcing a small fraction of component production may dominate either complete insourcing or complete outsourcing. Finally, we show that, with discounting, there is a convex, curvilinear relationship between the optimal outsourcing fraction and the rate of technological change.

Keywords: LEARNING, INTEGRATION, LEARNING CURVE, PRODUCT DEVELOPMENT, VERTICAL INTEGRATION, MODULARITY, PRODUCT DESIGN

JEL Classification: D20, D83, L22

Suggested Citation

Anderson, Edward G. and Parker, Geoffrey, The Effect of Learning on the Make/Buy Decision (September 1, 2002). Available at SSRN: https://ssrn.com/abstract=1938417 or http://dx.doi.org/10.2139/ssrn.1938417

Edward G. Anderson

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-6394 (Phone)
512-471-3937 (Fax)

HOME PAGE: http://ed@edanderson.org

Geoffrey Parker (Contact Author)

Dartmouth College ( email )

Department of Sociology
Hanover, NH 03755
United States
603-646-9075 (Phone)

HOME PAGE: http://engineering.dartmouth.edu/people/faculty/geoffrey-parker

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