Supplier Development and Integration in Competitive Supply Chains

Production and Operations Management 28(5): 1256–1271

51 Pages Posted: 9 Oct 2016 Last revised: 12 Nov 2019

See all articles by Yannan Jin

Yannan Jin

Shanghai University of Finance and Economics

Qiying Hu

Fudan University - School of Management

Sang Won Kim

KAIST College of Business

Sean Zhou

The Chinese University of Hong Kong (CUHK)

Date Written: October 6, 2016

Abstract

Supplier development and supplier integration are two deeply interconnected strategic tools that manufacturers often employ to improve the efficiency and competitiveness of their supply chains. This paper studies the interaction of these two strategic decisions in a competitive environment. Specifically, we consider a duopoly model where two supply chains, each consisting of one manufacturer and one sup- plier, sell substitutable products in the market. Each manufacturer orders components from its supplier and decides whether to integrate with the supplier and how much to invest to help reduce its cost. We find that, in most cases, a manufacturer invests more on supplier development after it integrates with its supplier; and both manufacturers integrate with their suppliers at equilibrium. However, when the heterogeneity of the manufacturers' supplier development capabilities is sufficiently high and the more capable manufacturer integrates, the less capable manufacturer would invest less on supplier development after integrating its supplier; and at equilibrium, the less capable manufacturer prefers not to integrate. Furthermore, when considering the suppliers' incentives to be integrated, we find that the less capable manufacturer is more likely not to integrate with its supplier. We also extend our model to another commonly seen sourcing structure, i.e, diversified sourcing, where each manufacturer sources from two common suppliers (but each only considers supplier integration and development for one distinct supplier). In contrast to the previous case (which we call dedicated sourcing), under diversified sourcing, supplier integration of a manufacturer always leads to its more supplier development investment and both manufacturers would integrate at equilibrium. Finally, when each manufacturer could choose whether to source from one or two suppliers, we show that dedicated sourcing is the equilibrium structure.

Keywords: competition, supplier development, supplier integration, sourcing strategy

Suggested Citation

jin, yannan and Hu, Qiying and Kim, Sang Won and Zhou, Sean, Supplier Development and Integration in Competitive Supply Chains (October 6, 2016). Production and Operations Management 28(5): 1256–1271, Available at SSRN: https://ssrn.com/abstract=2848993 or http://dx.doi.org/10.2139/ssrn.2848993

Yannan Jin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Qiying Hu

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Sang Won Kim (Contact Author)

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Sean Zhou

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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