Advertisement

Sourcing Co-Created Products: Should Your Suppliers Collaborate on Cost Reductions?

  • Oksana LoginovaEmail author
  • Niladri B. Syam
Article
  • 9 Downloads

Abstract

We study how a multi-product downstream firm should source from the upstream market—single-source versus multi-source—in a situation where the products are co-created with the suppliers. We conceptualize co-creation as investments that are made at the different hierarchical levels and that are aimed at reducing the production costs incurred by the supplies. In the case when the downstream firm sources its products from multiple suppliers, it can foster cost-reduction collaboration among the suppliers. We find that the downstream firm may be worse off when the upstream suppliers collaborate. For a commonly used additively separable cost function, we show that the downstream firm’s optimal strategy is multi-source co-creation without collaboration. Multi-sourcing softens the holdup problem and leads to a positive level of investment by the downstream firm.

Keywords

Co-creation Collaboration Holdup Product sourcing 

JEL Classification

C72 D4 L1 M31 

Notes

References

  1. Burke, G. J., Carrillo, J. E., & Vakharia, A. J. (2007). Single versus multiple supplier sourcing strategies. European Journal of Operational Research, 182(1), 95–112.CrossRefGoogle Scholar
  2. Calzolari, G., Felli, L., Koenen, J., Spagnolo, G., & Stahl, K. O. (2017). Relational contracts, competition and innovation: Theory and evidence from German car manufacturers. Working Paper.Google Scholar
  3. Coase, R. H. (2000). The acquisition of fisher body by general motors. Journal of Law and Economics, 43(1), 15–32.CrossRefGoogle Scholar
  4. Cohen, L., & Young, A. (2006). Multisourcing: Moving beyond outsourcing to achieve growth and agility. Brighton: Harvard Business School Press.Google Scholar
  5. Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35(1), 128–152.CrossRefGoogle Scholar
  6. Cohen-Vernik, D., Niladri, S., & Pazgal, A. (2018). Competing with co-created products. Working Paper.Google Scholar
  7. Feng, B. (2012). Multisourcing suppliers selection in service outsourcing. Journal of the Operational Research Society, 63(5), 582–596.CrossRefGoogle Scholar
  8. Goyal, S., & Moraga-González, J. L. (2001). R&D networks. RAND Journal of Economics, 32(4), 686–707.CrossRefGoogle Scholar
  9. Griffin, A., & Hauser, J. R. (1993). The voice of the customer. Marketing Science, 12(1), 1–27.CrossRefGoogle Scholar
  10. Grout, P. A. (1984). Investment and wages in the absence of binding contracts: A Nash bargaining approach. Econometrica, 52(2), 449–460.CrossRefGoogle Scholar
  11. Jaworski, B., & Kohli, A. K. (2006). Co-creating the voice of the customer. In R. F. Lusch & S. L. Vargo (Eds.), The service-dominant logic of marketing (pp. 109–117). New York: Routledge.Google Scholar
  12. Kalaignanam, K., & Varadarajan, R. (2006). Customers as co-producers: Implications for marketing strategy effectiveness and marketing operations efficiency. In R. F. Lusch & S. L. Vargo (Eds.), The service-dominant logic of marketing (pp. 166–179). New York: Routledge.Google Scholar
  13. Klein, B. (2000). Fisher-General Motors and the nature of the firm. Journal of Law and Economics, 43(1), 105–142.CrossRefGoogle Scholar
  14. Kogut, B., & Zander, U. (1992). Knowledge of the firm, combinative capabilities and the replication of technologies. Organization Science, 3(3), 383–397.CrossRefGoogle Scholar
  15. Levin, R. C., & Reiss, P. C. (1988). Cost-reducing and demand-creating R&D with spillovers. RAND Journal of Economics, 19(4), 538–556.CrossRefGoogle Scholar
  16. Liker, J., & Choi, T. Y. (2004). Building deep supplier relationships. Harvard Business Review, 82, 104–113.Google Scholar
  17. Moreau, C. P., Bonney, L., & Herd, K. B. (2011). It’s the thought (and the effort) that counts: How customizing for others differs from customizing for oneself. Journal of Marketing, 75(5), 120–133.CrossRefGoogle Scholar
  18. Moreau, C. P., & Herd, K. B. (2010). To each his own? How comparisons with others influence consumers’ evaluations of their self-designed products. Journal of Consumer Research, 36(5), 806–819.CrossRefGoogle Scholar
  19. Mukherjee, A., & Tsai, Y. (2013). Multi-sourcing as an entry deterrence strategy. International Review of Economics and Finance, 25, 108–112.CrossRefGoogle Scholar
  20. Pack, H., & Saggi, K. (2001). Vertical technology transfer via international outsourcing. Journal of Development Economics, 65(2), 389–415.CrossRefGoogle Scholar
  21. Payne, A. F., Storbacka, K., & Frow, P. (2008). Managing the co-creation of value. Journal of the Academy of Marketing Science, 36(1), 83–96.CrossRefGoogle Scholar
  22. Randall, T., Terwiesch, C., & Ulrich, K. T. (2007). User design of customized products. Marketing Science, 26(2), 268–280.CrossRefGoogle Scholar
  23. Redström, J. (2006). Towards user design? On the shift from object to user as the subject of design. Design Studies, 27(2), 123–139.CrossRefGoogle Scholar
  24. Sawhney, M., Verona, G., & Prandelli, E. (2005). Collaborating to create: The Internet as a platform for customer engagement in product innovation. Journal of Interactive Marketing, 19(4), 4–17.CrossRefGoogle Scholar
  25. Sen, D., & Tauman, Y. (2007). General licensing schemes for a cost-reducing innovation. Games and Economic Behavior, 59(1), 163–186.CrossRefGoogle Scholar
  26. Spencer, B. J. (2005). International outsourcing and incomplete contracts. Canadian Journal of Economics, 38(4), 1107–1135.CrossRefGoogle Scholar
  27. Shy, O., & Stenbacka, R. (2003). Strategic outsourcing. Journal of Economic Behavior and Organization, 50(2), 203–224.CrossRefGoogle Scholar
  28. Syam, N., & Pazgal, A. (2013). Co-creation with production externalities. Marketing Science, 32(5), 805–820.CrossRefGoogle Scholar
  29. Thomke, S., & von Hippel, E. (2002). Customers as innovators: A new way to create value. Harvard Business Review, 80(4), 74–81.Google Scholar
  30. Tirole, J. (1986). Procurement and renegotiation. Journal of Political Economy, 94(2), 235–259.CrossRefGoogle Scholar
  31. von Hippel, E. (1986). Lead-firms: A source of novel product concepts. Management Science, 32(7), 791–805.CrossRefGoogle Scholar
  32. von Hippel, E., & Katz, R. (2002). Shifting innovation to firms via toolkits. Management Science, 48(7), 821–833.CrossRefGoogle Scholar
  33. Wiener, M., & Saunders, C. (2014). Forced competition in IT multi‐sourcing. Journal of Strategic Information Systems, 23(3), 210–225.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of MissouriColumbiaUSA
  2. 2.Department of Marketing, Trulaske College of BusinessUniversity of MissouriColumbiaUSA

Personalised recommendations