Home or Overseas? An Analysis of Sourcing Strategies under Competition

Management Science 60(5) 1223-1240

32 Pages Posted: 26 Jun 2011 Last revised: 5 Feb 2015

See all articles by Xiaole Wu

Xiaole Wu

Fudan University - School of Management

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: May 23, 2013

Abstract

Motivated by the recent backshoring trend, this paper studies a sourcing game where competing firms may choose between efficient sourcing (e.g., sourcing from overseas) and responsive sourcing (e.g., sourcing from home country). Efficient sourcing usually provides a cost advantage, while responsive sourcing allows a firm to obtain more accurate demand information when making procurement decisions. By characterizing the equilibrium outcome, we find some interesting results driven by the strategic interaction between the firms. First, a firm may still use efficient sourcing in equilibrium even when the cost advantage associated with efficient sourcing does not exist. This is because the firm can dampen competition by reducing the correlation between her own demand information and the competitor's. Second, a cost hike in efficient sourcing (e.g., the rising labor cost in Asia) may benefit all the firms in the industry. The reason is that the cost hike may alleviate competition by inducing a new equilibrium sourcing structure. This paper also sheds some light on the recent backshoring trend. First, our analysis indicates that more firms will shift from efficient sourcing to responsive sourcing in equilibrium (i.e., backshore) if the market size shrinks, the demand becomes more volatile, or the sourcing costs rise simultaneously. Second, a firm's backshoring behavior reduces the competition on the cost dimension, but it also has an ambiguous informational impact on the other firms in the market. In particular, some firms may benefit from increased correlation of their demand information under Cournot competition with substitutable products. Overall, the backshoring behavior can be beneficial to all the firms sticking to their original sourcing strategies under certain conditions.

Keywords: Offshoring, backshoring, sourcing strategy, supply responsiveness, informaiton correlation

Suggested Citation

Wu, Xiaole and Zhang, Fuqiang, Home or Overseas? An Analysis of Sourcing Strategies under Competition (May 23, 2013). Management Science 60(5) 1223-1240, Available at SSRN: https://ssrn.com/abstract=1871425 or http://dx.doi.org/10.2139/ssrn.1871425

Xiaole Wu

Fudan University - School of Management ( email )

No.670, Guoshun Road
Shanghai, 200433
China

Fuqiang Zhang (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.olin.wustl.edu/faculty/zhang/

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