Single versus multiple sourcing and the evolution of bargaining positions

The size and importance of global contract manufacturers has risen along with the volume and pervasiveness of global subcontracting activities. Many contract manufacturers now equal or even dominate their customers in size and power, ending the historical dominance of original equipment manufacturers in subcontracting relations. We study a manufacturer's (or buyer's) single-versus-multiple sourcing decision under specific consideration of the effects on the evolution of power between the buyer and its supply base. Motivated by the trend towards less hierarchical sourcing relationships, we use the generalized Nash bargaining framework to model contract negotiations. Being awarded a contract allows suppliers to progress on their learning curves, leading to lower future production costs. The buyer's primary trade-off between single and multiple sourcing then is as follows. Whereas single sourcing leads to more pronounced learning effects and thus more drastic cost reductions, it increases the active supplier's relative bargaining position, as the buyer's outside option becomes comparatively less competitive. Considering this trade-off, we find that the buyer's optimal sourcing strategy depends on both its bargaining capabilities and the rate at which learning by doing reduces production costs. A powerful buyer might indeed prefer single sourcing, but weaker buyers will generally be better off splitting their volume between different suppliers to maintain a viable alternative source. While splitting the volume maximizes a weak buying firm's profit, it always leads to inefficiencies, since the highest possible system profit would be achieved by concentrating learning effects at one supplier (single sourcing). (C) 2015 Elsevier Ltd. All rights reserved.