Supply Networks for Relational Sourcing

42 Pages Posted: 7 Jan 2014 Last revised: 12 Oct 2015

Elena Belavina

The University of Chicago Booth School of Business

Karan Girotra

INSEAD - Technology and Operations Management

Date Written: October 12, 2015

Abstract

Making long-term commitments to exclusive suppliers, or relational sourcing, is critical in industries where quality includes social, ethical, and technical elements concerning which contractual terms would be costly to verify or enforce. This study identifies supplier network topologies that best facilitate such relational sourcing. We consider a brand-owning firm that sources in an ongoing fashion from a general multi-tier network of idiosyncratic suppliers. Alternate network designs are compared in terms of three defining structural properties: network scope, the number of suppliers at each tier in the network; degree of control/delegation, the number of tiers in the network; and network connectivity, the connections between firms located at different tiers. Our analysis reveals that neither network connectivity nor the distribution of costs among suppliers affects the ability to sustain relational sourcing. Networks characterized by more delegation or less scope have the most to gain from relational sourcing, but they are also most vulnerable to exploitation of a relational agreement. We characterize this trade-off and identify preferred network topologies. Our analysis shows that, all else equal, delegation is better than control for products with higher margins, greater sourcing stability, or lower costs of noncompliant quality. Numerical analysis reveals that low-scope networks, too, are preferable for higher-margin products with greater sourcing stability; however, low-scope networks are preferred at higher costs of noncompliant quality. These results are robust to alternate information environments, supplier replaceability and equilibrium concepts.

Suggested Citation

Belavina, Elena and Girotra, Karan, Supply Networks for Relational Sourcing (October 12, 2015). INSEAD Working Paper No. 2015/78/TOM. Available at SSRN: https://ssrn.com/abstract=2375663 or http://dx.doi.org/10.2139/ssrn.2375663

Elena Belavina (Contact Author)

The University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
+1 773 834-3038 (Phone)

HOME PAGE: http://www.chicagobooth.edu/faculty/bio.aspx?person_id=49970841600

Karan Girotra

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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