Demand Uncertainty and Production Outsourcing

60 Pages Posted: 20 Aug 2015 Last revised: 19 Apr 2019

See all articles by Hilal Atasoy

Hilal Atasoy

Temple University - Department of Accounting; IZA Institute of Labor Economics

Rajiv D. Banker

Temple University - Department of Accounting

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting

Date Written: July 1, 2014

Abstract

We examine the relation between demand uncertainty and firms’ production outsourcing decisions. Contrary to the traditional view on make-or-buy decisions in management accounting textbooks, we predict that demand uncertainty deters outsourcing by a manufacturer from a supplier. Building on transaction cost economics and operations management research, we argue that outsourcing can increase the production lead time and cause excessive production variability due to incentive misalignment between the manufacturer and the supplier. These adverse effects increase the transaction costs of outsourcing. When demand uncertainty is high, these transaction costs can outweigh the supplier’s cost advantage, leading to less outsourcing. Using a large representative sample of manufacturing firms in Turkey, we find a significant negative relation between demand uncertainty and outsourcing, as predicted. This relation varies predictably with moderating factors that influence the tradeoff between the transaction costs of outsourcing and the supplier’s cost advantage, consistent with the theory.

JEL Classification: M11

Suggested Citation

Atasoy, Hilal and Banker, Rajiv D. and Byzalov, Dmitri, Demand Uncertainty and Production Outsourcing (July 1, 2014). Available at SSRN: https://ssrn.com/abstract=2647114 or http://dx.doi.org/10.2139/ssrn.2647114

Hilal Atasoy (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://astro.temple.edu/~dbyzalov/

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