Tuesday, October 13, 2015

Supply Networks for Relational Sourcing

Read the working paper
INSEAD Working Paper 2015/78/TOM revised version of 2015/33/TOM

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.