UNDERSTANDING THE SUPPLY CHAIN OUTSOURCING

CASCADE: WHEN DOES PROCUREMENT FOLLOW

MANUFACTURING OUT THE DOOR?
BARRY L. BREWER
University of Wyoming

Bryan Ashenbaum
Miami University

Joseph R. Carter
Arizona State University

Does the outsourcing of manufacturing trigger a cascade of follow-on out-

sourcing, wherein related procurement activities are subsequently
entrusted to one’s outsourcing partner? We explored this question in a
survey of US-based electronics original equipment manufacturers (OEMs)
who have outsourced production to a contract manufacturer (CM). Trans-
action-cost economics and the resource-based view were used as theoreti-
cal lenses to assess six potential drivers of this decision, utilizing direct
and indirect-effects structural models across five phases of procurement
activity. Results suggest that some sets of conditions appear to lend them-
selves to a wholesale outsourcing approach, wherein the CM is entrusted
to both manufacture a product and engage in various procurement
activities. Other conditions foster a more retail approach to procurement
outsourcing, with limited or no follow-on outsourcing of procurement
activities. In general, firms seem more comfortable outsourcing tactical
procurement activities, entrusting strategic activities to CMs only when the
product is highly commoditized or when the CM controls access to
international resources the OEM is unable to leverage on its own. Overall,
the relationship between manufacturing and procurement outsourcing is
complex and contingent on a variety of factors.

Keywords: outsourcing (make or buy); procurement; purchasing; supply chain

management; contract manufacturing; transaction-cost economics; resource-based view

INTRODUCTION Ellram and Maltz (1997) stated that “many organiza-

The growth of contract manufacturing over the last tions do not outsource these supply management
few decades is a well-documented phenomenon, activities at all” (p. 23). On the other hand, more
particularly within specific industries (Baatz, 1999; recent literature suggests that firms are now willing to
Carbone, 2000; Plambeck & Taylor, 2005). Less well shed activities once considered strategic to focus
understood is whether this triggers an “outsourcing on ever-more narrowed core competencies (Kroes &
cascade” — does the outsourcing of manufacturing Ghosh, 2010; Parry, James-Moore & Graves, 2006). A
make the follow-on outsourcing of related functions 2005 survey on strategic outsourcing indicated that
(such as procurement) more likely, or less? What firms were outsourcing up to 20 percent of transaction
contextual factors influence this? With regard to the processing, 13 percent of supplier management
general outsourcing of procurement (absent a con- activities, and 15 percent of procurement strategy
tract manufacturing context), the literature is unclear. activities for indirect/service purchases, with percent-

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 When Does Procurement Follow Manufacturing Out the Door

ages for direct material procurement activities being CONCEPTUAL DEVELOPMENT

roughly half of these values, respectively (Monczka,
Markham, Carter, Blascovich & Slaight, 2005b). The Contract Manufacturer’s Expanding Role
When an original equipment manufacturer (OEM) Contract manufacturing has been defined in several
outsources manufacturing, it must make a series of ways (Kim, 2003; McClintock (2002); for this study,
choices regarding the related procurement activities: it is defined as the act of contracting with a firm to
Should these be retained in-house, or likewise follow produce a product that will carry the OEM brand.
the manufacturing activity to the contract manu- Growth has been rapid for several decades: In 1999,
facturer (CM)?1 From a theoretical standpoint, the Baatz reported that 54 percent of computer, commu-
decision to decouple or link manufacturing and nications, automotive, medical, and industrial control
procurement activities holds great interest. OEMs that equipment OEMs outsourced some manufacturing,
outsource manufacturing but retain procurement may and in pharmaceuticals, estimates of CM use have
consider expertise in the latter to be a distinctive capa- climbed from 20 percent in 1988 to 60–70 percent in
bility that provides competitive advantage, or may sim- 2005 (Plambeck & Taylor, 2005). While initially con-
ply be unwilling to risk allowing the CM to control a sidered a buffer to meet capacity surges, contract man-
portion of their supply base. Conversely, other OEMs ufacturing has grown into a competitive weapon for
may have determined that the CM possesses a resource many firms (Carbone, 2000; Gregory, 1995; Harring-
or capability advantage in combined procurement and ton, 2000; Kador, 2001). Increasing rates of techno-
manufacturing, or may see little hazard in allowing the logical change, a reluctance to invest in manufacturing
CM to negotiate on its behalf with suppliers. equipment, a booming economy, and increased global
As such, this study considers the following research competition all contributed to the CM’s transforma-
question: When manufacturing is outsourced, what tion from temporary relief valve to strategic supply
are the factors that influence the decision to engage in chain partner (Carbone, 2000; Frohlich & Dixon,
follow-on outsourcing of the related procurement 2001; Mason, Cole, Ulrey & Yan, 2002).
activities or to retain them in-house? The answer to The service offerings of CMs have also broadened in
this question would, in our opinion, provide useful scope during this time frame, including new product
and interesting insights for academics and practitio- development, MRO parts procurement, assembly,
ners within the supply chain management field. While inventory management, distribution, and order fulfill-
“outsourcing” in a broad or single-function sense has ment (Carbone, 1996a,b; Cheng, 2010; Greenstein,
been widely studied, there has been little work done 2005; Hameri & Paatela, 2005; Harrington, 2000;
to understand the linking of multiple outsourcing Kador, 2001; Sherman, Leone & Klomp, 2009). While
decisions, a situation which (in our view) is likely OEMs have taken advantage of these expanded offer-
something with which all companies who have made ings, the outsourcing of direct materials procurement
an outsourcing decision must contend. Practitioners had traditionally been far less prevalent (Ellram &
would likewise benefit from a deeper understanding Maltz, 1997; Ulku et al., 2007). Possibly, this is due
of the drivers and contextual influences on whether or to the strategic role procurement has played in sup-
not to escalate the outsourcing decisions already plier selection, contract management, and evaluation
made. Two widely used theoretical lenses, transaction- (Kotabe & Mol, 2009; Rajagopal & Bernard, 1993).
cost economics (TCE) and the resource-based view Alternately, fears of weakening vital supplier relation-
(RBV), are utilized in this study to focus our examina- ships or realizing fewer gains in cost reduction may
tion and sharpen hypothesis development. also have impacted these decisions (Edwards, 1997;
The next section of this paper details the conceptual Koskie, 2002; O’Brien, 2002).
development and presents the study’s hypotheses. As noted above, however, the outsourcing of pro-
Subsequent sections detail the methodology, results curement activities seems much more mainstream. As
and implications thereof. We close with a recap of such, it is incumbent upon academics and practitio-
study contributions and limitations, and a call for ners to understand the drivers of this trend. The sec-
future research. tion below details the theoretical lens through which
this study attempts to better understand these drivers
and develop testable hypotheses.

The Theoretical Lens: A Transaction-Cost and

1
For example, Apple has outsourced procurement to Solectron Resource-Based Synthesis
for Product Commoditization (PC) manufacture, but retained While a number of theoretical lenses have been uti-
direct materials procurement responsibility for photocopiers lized to study outsourcing as a phenomenon, perhaps
made by Flextronics (Ulku, Toktay & Yucesan, 2007). In a differ-
the two most directly connected with this decision
ent situation, Motorola outsourced materials procurement to a
CM, then pulled it back in-house (Sullivan, 2003). are TCE and the RBV. Sometimes referred to as an

July 2013 91
 Journal of Supply Chain Management

“external” perspective, TCE is primarily concerned resource position or capability are likely to be retained
with the boundaries of the firm, defined as whether a in-house, and those for which resource position or
particular transaction or activity is conducted within capability is weak provide an impetus for outsourcing.
the hierarchy of firm governance, or is outsourced to Procurement in particular has been the subject of
the market (it also considers a number of hybrid recent debate regarding its potential as a VRIN resource
governance structures in-between; Coase, 1937; Wil- (Priem & Swink, 2012). Proponents of RBV theory
liamson, 1971, 2008). The primary behavioral (Barney, 2012) and of related theories of competition
assumptions related to TCE are found in the human (Hunt & Davis, 2012) both agree that the procurement
behavioral aspects of contracting. Put simply, transac- function meets all the requirements to be a VRIN
tions involving the investment of specific assets and/ resource, especially with regard to its relational and
or having a high degree of uncertainty are more likely market intelligence capabilities. The ability to assess
to be kept inside the firm, as these characteristics and leverage the skills and competencies of supply
make outsourcing a risky proposition, in light of chain partners — to select the right functions to out-
bounded rationality (one can never know everything) source to more capable partners — is a key to procure-
and potential opportunism (people will often behave ment’s delivered value (Ketchen & Hult, 2007). Along
in a way inimical to a contracting partner’s interests, these lines, Hitt (2011) has argued that from an RBV
“self-interest seeking with guile” (Williamson, perspective, capability includes the knowledge of when
1985)).2 to acquire, develop, and divest resources.
Asset specificity in procurement is best thought of as In a 2009 paper, Ronan McIvor fused the TCE and
human asset specificity — companies make consider- RBV perspectives into a framework specifically assess-
able investments in building (or obtaining) skillful ing the outsourcing decision. TCE provides an “exter-
and knowledgeable buyers. Procurement personnel nal” element to this framework, focusing upon the
often build relationships with suppliers that enable potential for opportunism (and by implication, the
trust, cooperation, knowledge sharing, and value crea- presence of transaction-specific assets) in any out-
tion at an interfirm level. These relationships and sourcing decision. The RBV brings the “internal” ele-
knowledge may not be transferable to a CM. Addi- ment, focusing upon a firm’s resource position vis-a-
tionally, specific investments in EDI or interorganiza- vis potential suppliers or competitors. The resulting
tional systems to manage supply chain activities may framework (see Figure 1) suggests that for an activity
also be difficult to transfer. Likewise, there are varying in which the firm has a weak resource position or
degrees of uncertainty regarding the successful pro- capability, and the potential for opportunism is low,
curement of needed items, especially for the procure- outsourcing is the best option. Retention is logical in
ment of high-impact items in risky markets (Terpend, the opposite case, where the firm enjoys strong
Krause & Dooley, 2011). Sources of uncertainty in this resource position and opportunism potential is high.
context can include variation in order quantities, lead There are also instances where the framework gives
times, product demand, transportation requirements, contradictory advice in the instances where the TCE
inventory requirements, government regulation, prod- and RBV assessments would lead in different direc-
uct decisions, and international shipping requirements tions (again, see Figure 1).
(e.g., Wever, Wognum, Trienekens & Omta, 2012). As detailed in the section below, the academic and
Variation in any of these may affect the CM’s ability practitioner literature provides a number of clues as to
to provide the level of service required in a competi- the potential drivers of the decision to outsource
tive market or industry.
The RBV provides a more “internal” perspective, sug-
gesting that competitive advantage can be gained from FIGURE 1
effectively utilizing resources that are valuable, rare, TCE-RBV Outsourcing Matrix
imperfectly imitable and nonsubstitutable, or VRIN Superior
(Barney, 1991). Such resources include not only the TCE: Outsource TCE & RBV:
RBV: Perform Perform
physical assets of the firm, but also intellectual, tech- Resource Internally Internally
nological, and human capital assets. Firm internal Position
TCE & RBV: TCE: Perform
resources and capabilities can thus be compared Outsource Internally
RBV: Outsource
against those of competitors or potential suppliers. Weak
Low Potential for High
Activities in which the firm maintains a superior
Opportunism
2
TCE posits a third transaction characteristic, frequency, as a (From McIvor 2009)
driver of the outsource decision. However, the literature-based
evidence for transaction frequency as a driver of the outsourcing RBV, resource-based view; TCE, transaction-cost
decision is mixed at best, and we do not consider it further economics.
here.

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 When Does Procurement Follow Manufacturing Out the Door

procurement activities. For our purposes, McIvor’s TCE- be outsourced, the OEM must be very careful in weigh-
RBV framework provides a useful theoretical lens ing whether the related procurement activities should
through which to view these potential drivers and shar- be outsourced, in light of their potential contribution
pen our hypotheses in terms of prediction and logic. to the competitive advantage afforded by the product.
OEMs do not usually release procurement responsibil-
HYPOTHESIS DEVELOPMENT ity in these cases to CMs because they need to main-
tain relationships with critical component suppliers to
Product Core Competence Contribution prevent diffusion to competitors. To protect human,
An OEM often relies on a core product central to its technological, or intrafirm specific assets inherent to
brand identity to achieve competitive advantage (Prah- core products, OEMs will tend to procure materials
alad & Hamel, 1990). Purchased inputs for these core internally, ensuring a desired level of quality or
products can likely be classified as strategic buys — responsiveness required by a core product. In this way,
highly impactful and requiring considerable skill on overall business strategy is aligned with procurement
the part of the buyer (Terpend et al., 2011). We pro- strategy (Baier, Hartman & Moser, 2008).
pose a construct here called product core competence Per the TCE-RBV framework, the activities surround-
contribution (PCCC) to assess the extent to which a ing a core product represent a strong resource posi-
product can be considered core (see Table 1). While tion. Procurement, in this case, relies on strong
the manufacturing of a core product can certainly still human assets such as skills in negotiation, supplier

TABLE 1
Procurement Outsourcing Drivers
Product core PCCC examines how important product or major subsystem and its components are
competence to the firm’s core competence strategy. Core products are often the basis for
contribution business strategy, competitive advantage, and brand value (Prahalad & Hamel, 1990).
Contract Contract manufacturers offer a bundle of services to the OEM to include
manufacturer manufacturing, design, supply chain support, and access to resources (Hayes, 2002;
competitive Kador, 2001; Mason et al., 2002; Ono & Stango, 2005). CMCA is composed of the
advantage major CM capabilities OEMs consider in the outsourcing decision.
Contract CMPC details the procurement capabilities that CMs own that will affect the
manufacturer procurement outsourcing decision. These capabilities include the level of excellence
procurement in the procurement function’s performance, their relative leverage, and the level
competence of control of critical resources (Barney, 1991; Ellram & Billington, 2001; McClintock,
2002; Plambeck & Taylor, 2005).
OEM OEMPC details the procurement capabilities that OEMs own that affect the
procurement procurement outsourcing decision. These capabilities include the procurement
competence function’s contribution to lasting firm competitive advantages, the level of
excellence in performance, their level purchasing leverage, and how much they
control critical resources (Barney, 1991; Venkatesan, 1992).
Supply base Purchasing functions seek to build high-performing supply bases that often include
maintenance specific knowledge and assets that enable competitive advantage. SBM seeks to
keep existing supplier relationships, to keep the product’s existing supply base,
and to maintain relationships with suppliers to other products OEMs manufacture
(Lao et al., 2010; Watts et al., 1992; Zsidisin & Ellram, 2001).
Competitive CI is a measure of competition or uncertainty in the industry. This construct
intensity examines the pace of technological change, product lifecycles, the threat of
substitutes, the rate of product obsolescence, and the rate of manufacturing
obsolescence (Fine, 1998; Porter, 1979, 1980).
Product As a product matures it typically becomes a common good that competes through
commoditization a low-cost approach. PC captures the evolution of products as they mature by
capturing the level of maturity of the product specification, the level of
standardization direct materials, and the level of differentiation (Fisher, 1997;
Kraljic, 1983; Olsen & Ellram, 1997; Safizadeh et al., 1996).
CMCA, CM competitive advantage; CMPC, CM procurement competence.

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 Journal of Supply Chain Management

market knowledge, and building relationships with service (Venkatesan, 1992). As one example, outsourc-
suppliers. Further, this resource position has very ing materials procurement for a given product to a
possibly evolved into a distinctive capability or core CM can have a deleterious effect on the OEM’s ability
competence that should be kept in-house under to use volume leverage as a means to reduce cost. The
almost all circumstances (Prahalad & Hamel, 1990). CM may not be as significant of a buyer as the OEM,
The opportunism potential in outsourcing such strate- resulting in higher input costs than before!
gic procurement activities is likely high; those outside In other cases, an OEM may control the supply of a
the company would control crucial supplier linkages critical resource through its strategic procurement
in the event of procurement outsourcing. Therefore: activities (Barney, 1991). Outsourcing procurement in
this situation runs the risk of loss of control over the
H1: Product core competence contribution is nega-
resource in question. This loss of control could enable
tively related to procurement outsourcing.
competitors to enter the market or compete more
efficiently (Venkatesan, 1992) or may simply allow
CM Competitive Advantage them access to the previously controlled material
Contract manufacturers bring a package of resources through the CM (because many CMs are suppliers to
to the market that enable OEMs to bring products to firms who compete with one another).
market faster while shedding functions in which they Last, it is stressed that overall corporate, manufactur-
do not possess a competitive advantage (Blanchette, ing, and procurement strategies must be aligned for a
2004; Carbone, 2000; Kador, 2001; Keegan, 2004; firm to retain competitive advantage (Pagell & Krause,
Mulcahy, 2001). While the primary resource a CM 2002; Watts, Kim & Hahn, 1992). Such strategic
may possess is manufacturing cost and efficiency alignment is achieved in part through cross-functional
through scale economies (Mason et al., 2002; Ono & relationships fostered by top management in order to
Stango, 2005), many also bring higher-quality, design achieve a coordinated approach (Rajagopal & Bernard,
expertise or a strong procurement knowledge base 1993). Taken together, leverage, control of critical
(Hayes, 2002; Kador, 2001). inputs, and successful strategic alignment come
The greater the scope of competitive advantage (i.e., together conceptually as OEM procurement compe-
package of resources) offered by the CM, the greater tence (OEMPC).
the propensity for procurement outsourcing to follow However, these same arguments could be made in
manufacturing outsourcing. CMs that control product favor of outsourcing to the CM through a mirror con-
specification already have the procurement skills and cept called CM procurement competence (CMPC). Cost
supplier relationships to effectively perform this func- reduction is the most frequently cited reason for out-
tion (Carbone, 2000; Labowitz & White, 2001). The sourcing (Antelo & Bru, 2010; Bustinza, Arias-Aranda &
CM is now in a strong resource position vis-a-vis the Gutierrez-Gutierrez, 2010; Gray, Tomlin & Roth, 2009;
OEM with regard to procurement skills and knowl- Kotabe, Mol & Murray, 2008). An underlying assump-
edge, and from the TCE viewpoint, the human asset tion for this is that CMs have considerable leverage of
specificity with regard to procurement is higher in their own through scale economies and superior manu-
the CM. This can also be seen as a lower opportun- facturing efficiencies. CMs may combine the input
ism risk for the OEM, as the outsourcing of procure- needs of multiple OEM customers, creating a spend
ment activities in this case does not surrender crucial pool larger than any single OEM (McClintock, 2002;
supplier relationships to a possibly opportunistic sup- Plambeck & Taylor, 2005). Commonality or similarity
plier; the CM already leverages these relationships on of inputs for divergent products or industries may also
behalf of its clients and has in fact invested signifi- contribute to CM leverage to the advantage of the OEM
cant human assets into building this capability. (Ellram & Billington, 2001; McClintock, 2002).
Therefore: Likewise, the reverse argument could be made for
critical resources: By outsourcing procurement to a
H2: CM competitive advantage (CMCA) is posi-
CM, an OEM may gain access to a critical resource or
tively related to procurement outsourcing.
input that it had previously been denied. From a stra-
tegic alignment standpoint, the argument in favor of
Procurement Competence (OEMPC, CMPC) retaining procurement can be reversed: Because strate-
US-based electronics manufacturers should consider gic alignment among functions is key to competitive
how the decision to outsource procurement will success, it makes sense to the CM as well so that the
impact the firm and the OEM’s potential to contribute OEM’s manufacturing and procurement functions
through procurement activity. When OEMs have now reside together under one “roof” again, thus
world-class purchasing organizations, piecemeal out- making strategic alignment and cross-functional coop-
sourcing may negatively impact the strength of that eration easier. CMPC also rests on leverage, control of
function and its ability to provide the current level of critical resources, and strategic alignment.

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 When Does Procurement Follow Manufacturing Out the Door

In either case, the issue can be viewed theoretically man out” in this relationship, the CM does not enjoy
as a relative comparison between OEM and CM pro- the same close relationship with the OEM as its tradi-
curement resource position — which organization is tional suppliers, and so an OEM may see high oppor-
in a stronger resource position through leverage? Does tunism potential in outsourcing such a crucial link to
linking procurement with manufacturing at the CM the CM. While not an internal resource per se, a heavy
provide a better strategic alignment, or does retaining emphasis on SBM activities helps to leverage the
procurement at the OEM to better connect with top strengths of the supply base as a resource to aid the
management over business competitive strategy do so? OEM’s competitive advantage, per the discussion by
Does outsourcing increase opportunism potential Ketchen and Hult (2007). Therefore:
through the risk of losing control over a critical
H5: Supply base maintenance is negatively related
resource, or is opportunism risk lowered via gaining
to procurement outsourcing.
access to a previously inaccessible resource through
the CM? We posit that OEM and CMPC work at odds
with one another in this decision: Product Commoditization
Over time, it is common for a once-innovative and
H3: OEM procurement competence is negatively
highly differentiated product to become commodi-
related to procurement outsourcing.
tized (Fisher, 1997). This occurs as product specifica-
tions mature or as the level of standardization
H4: CM procurement competence is positively
increases, and is often accompanied by an increase in
related to procurement outsourcing.
production volume. Production approaches often shift
along with product characteristics — high flexibility
Supply Base Maintenance may give way to cost in terms of importance as the
A main focus of procurement is to build a compe- product standardizes and volumes increase (Safizadeh,
tent supply base that functions as a competitive Ritzman, Sharma & Wood, 1996). Indeed, the impe-
weapon (Lao, Hong & Rao, 2010; Watts et al., 1992). tus for the original decision to outsource manufactur-
As such, OEMs invest significant amounts of time and ing to the CM may be the need to leverage cost-
resources in suppliers to build lasting and productive efficiencies and scale economies in the production of
relationships or alliances (Zsidisin & Ellram, 2001), a a high-volume product.
process we refer to here as supply base maintenance That being the case, a similar set of considerations
(SBM). The buildup of strong supplier relationships is applies to the decision to outsource procurement activi-
time-consuming and, as one might expect, represents ties to the CM. In theory, products that are highly stan-
a significant investment by the OEM in the human dardized do not require specialized materials or
assets involved in such development efforts. components (Williamson, 1985), and procurement
When manufacturing is outsourced, suppliers must activity is focused on the acquisition of commodities or
interface with the CM to deliver raw materials in a standard materials readily available in the market (Kra-
timely manner. However, these suppliers likely recog- ljic, 1983; Olsen & Ellram, 1997). On the other hand,
nize that the ultimate customer is the OEM, especially differentiated products require more specialized inputs.
those suppliers that the OEM has been careful to culti- The acquisition of these specialized inputs requires
vate. In these cases, outsourcing procurement activities more specialized knowledge and skills — higher
may not make sense from a strategic standpoint. The human asset specificity, as it were. For example, when
CM may be seen as a “tollgate” or pass-through that Apple outsourced computer production to Solectron, it
is largely noninfluential in the OEM–supplier relation- also outsourced the corresponding materials procure-
ship. The OEM may even have special pricing that it ment responsibilities. But when a more differentiated
has no wish to reveal to the CM, and by retaining photocopier was outsourced to Flextronics, these activi-
procurement responsibility, it ensures remains secret. ties were retained in-house (Ulku et al., 2007).
In an attempt to limit the diffusion of core informa- Product commoditization can be viewed as a reverse
tion, SBM efforts may stymie the outsourcing of pro- indicator of required asset specificity. Physically, the
curement activities through contractual safeguarding production of standardized inputs should require
and the formation of binding long-term alliances (Ox- fewer transaction-specific investments than for special-
ley, 1999). ized inputs (e.g., there is less likely to be a require-
From a theoretical perspective, cultivating strong ment for a single-use machine). From a human asset
relationships with suppliers is another form of specific standpoint, the procurement of standardized inputs
investment, where the “asset” in this case is goodwill should require a less specialized skillset. In the
and the leveraging of the supply bases resources in absence of transaction-specific physical or human
favor of the OEM. Although not necessarily the “odd assets, the potential for opportunism is lowered and

July 2013 95
 Journal of Supply Chain Management

conditions favor outsourcing. The CM in this case also position via a highly skilled procurement group.
likely holds the superior resource position from a pro- Therefore:
curement skills perspective, as leveraging large vol-
H7a: Higher levels of competitive intensity will
umes across multiple customers is part of the CM’s
strengthen the negative relationship between OEM
basic value proposition. Therefore:
procurement competence and procurement out-
H6: Product commoditization is positively related sourcing.
to procurement outsourcing.
H7b: Higher levels of competitive intensity will
strengthen the negative relationship between SBM
Competitive Intensity
activities and procurement outsourcing.
As a final consideration, the level of competitive
intensity faced by an organization has a wide-rang-
H7c: Higher levels of competitive intensity will
ing impact on multiple business decisions. Competi-
strengthen the positive relationship between PC
tive intensity is increased with large numbers of
and procurement outsourcing.
competitors, competing product entry, the threat of
credible substitutes, short product lifecycles, and rap- Taken together, the hypotheses derived in the above
idly evolving technologies (Fine, 1998; Porter, 1979, section give rise to the theoretical model for this
1980). In such competitive environments, a firm study, seen in Figure 2.
will strive to achieve efficiency and lower capital
investments by outsourcing noncore functions. METHODOLOGY AND RESULTS
From a transaction-cost perspective, highly competi-
tive environments are marked by higher levels of Scale Development, Sampling Approach, and
uncertainty, which when combined with higher levels NRB Testing
of human-specific assets tends to foster retention of Although this study utilizes the extant procurement
activities rather than outsourcing (Williamson, 1985, and outsourcing literature to develop hypotheses, the
1986, 1999). We therefore posit that high competitive constructs proposed have not yet had scales developed
intensity will amplify the relationships in this study to measure them; as such, most of the scales used are
that have a greater reliance on human or other asset exploratory in nature. Content validity, a preliminary
specificity: OEMPC, SBM, and PC. assessment of whether construct domain has been
US-based electronics manufacturers procurement adequately represented by the scale items, was
competence and SBM involve the OEM investing assessed by a panel of 13 procurement managers and
considerable resources in building the skillsets of its 10 academics. They answered the questions posed by
procurement specialists (OEMPC) or in strengthen- the survey instrument, evaluating it in terms of con-
ing relationships with the existing supply base cept and instruction clarity, ease of readability, and
(SBM). The increased uncertainty inherent in a ambiguity. Based on their review and suggested
highly competitive environment thus acts to further changes, we believe content validity has been estab-
the potential for opportunism in the presence of lished for the scales used in this study — please see
these specific assets: Will the CM hire away the Appendix A for the items used (DeVellis, 2003).
trained procurement specialists to continue their As the unit of analysis for this study was the pro-
roles (albeit with a new company), and bring their curement outsourcing decision, the sample contained
expertise to benefit the CM’s other customers (i.e., respondents who were procurement professionals in a
the OEM’s competitors)? Likewise, will the CM act firm that had already outsourced the manufacturing
to co-opt important supplier relationships now that of a specific product, and were thus in a position to
they are the primary interface and not the OEM? consider the follow-on outsourcing of related procure-
These troubling questions will likely give the OEM ment activities. Procurement is a broad term, and
pause as it considers the outsourcing of materials encompasses many activities from the formation of
procurement. strategy, through supplier evaluation and selection to
On the other hand, PC acts as a reverse marker for tactical actions such as ordering material and monitor-
asset specificity — a highly standardized input in the- ing supplier performance. Because of this, the
ory represents a smaller level of both physical and dependent variable for this study (procurement out-
human asset investment. As asset specificity is lower sourcing) was measured across five phases of a largely
for these commoditized inputs, opportunism potential accepted procurement framework (see Table 2).
is decreased and the lowered asset investment also Respondents were asked to report the percentage of
indicates a smaller likelihood of superior resource activity outsourcing their firm engaged in for each

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 When Does Procurement Follow Manufacturing Out the Door

FIGURE 2
Theoretical Model

Product Core
Competence (-) H1
Contribution

CM
Competitive (+) H2
Advantage

CM
Procurement (+) H4
Competence

OEM
(-) H3
Procurement
Competence

(-)H7a

Procurement
Competitive Outsourcing
Intensity (-)H7b

(-) H5
Supply Base
(+)H7c Maintenance

(+) H6 CM = Contract
Product Manufacturer
Commoditization OEM = Original
Equipment
Manufacturer

phase, on a scale with 10-percent increments, again performed on 20 sample items between the first 40
with the outsourced product or subsystem in mind. and the last 40 respondents (who approximate nonre-
As procurement outsourcing in isolation does not sponders), with no significant differences found. We
readily exist in practice, the scenario of outsourcing conclude that nonresponse bias is not a concern for
manufacturing to a CM was chosen. In this scenario, this study.
outsourcing firms must decide in addition to the man-
ufacturing outsourcing decision if they will outsource Reliability and Validity Assessment
procurement. This scenario was selected to find Confirmatory factor analysis (CFA) was used to
enough relevant data points for analysis. establish unidimensionality, convergent and discrimi-
Data were collected via an online survey per the nant validity, and structural equation modeling (SEM)
methods proposed by Dillman (2000). A random was used to estimate the construct-level relationships
sample of 2,996 subscribers to Purchasing magazine (Anderson & Gerbing, 1988). As the data failed to
(PM) and members of the Institute of Supply Manage- meet the assumption of multivariate normality, the
ment who worked in the electronics industry received analysis used a robust maximum-likelihood method
the initial survey request, which fell to a final sample within the LISREL software designed to account for
of 1,717 after the removal of nonviable respondents this. The overall CFA model statistics indicate good fit
(invalid email addresses, duplicates, etc.). Two hun- between the construct structure and the data (see
dred and sixty-eight usable responses were obtained, Table 3). Unidimensionality and convergent validity
resulting in a 15.6 percent response rate. Nonresponse were established by the examination of standardized
bias testing was conducted by comparing early and residuals and modification indices, and an assessment
late waves of respondents (Armstrong & Overton, of the sign, significance, and magnitude of individual
1977; Lambert & Harrington, 1990). T-tests were factor loadings (see Appendix A). During the scale

July 2013 97
 Journal of Supply Chain Management

purification process, items were dropped that had

Adapted from Monczka, Trent & Handfield (2005a); Ellram & Edis (1996); Banfield (1999); Zeng (2003); Anderson & Katz (1998); Ellram &
Phase 5: Measure and

• Identify improvement
high modification indices or poor loadings on their

Manage Supplier

• Monitor supplier’s
latent construct (Appendix A also displays these

Performance

• Analyze supplier
dropped items). Discriminant validity was examined

opportunities

relationships
performance
via pairwise chi-square difference tests for all construct
pairs and at the model level. In this test, two CFA
models are run for each test, one in which correla-
tions are allowed to vary and another in which they
are constrained to one. Statistically significant chi-
square difference tests with a p-value of <.001 were
found at the model level and pairwise level, thus
providing evidence of discriminant validity (Garver &
Mentzer, 1999). Additionally, convergent validity was
Monitor inventory
Phase 4: Procure

Receive materials

assessed by ensuring items loaded significantly on

Inspect materials
Order materials

their a priori latent variable without loading on other

Materials

latent variables (Anderson & Gerbing, 1988).

To address common method bias, we used a
Harman one-factor test estimating an exploratory fac-
tor analysis with the 43 variables. Thirteen factors
emerged with eigenvalues greater than one. However,
•
•
•
•

the scree plot indicated the number of viable factors

to be approximately seven. Sixteen percent of the vari-
ance in the data was explained by the first factor.
Procurement Framework

Because the items did not load on a single factor and

Phase 3: Screen and

• Release request for

and logistics terms

there was no dominant factor with the majority of the

Select Suppliers

past performance
• Analyze bids and

• Agree on supply
finalize contract
proposal (RFP)

variance, there was no indication of the presence of

• Select supplier
• Negotiate and

common methods bias (Harman 1967). Additionally,

TABLE 2

overall model fit statistics, and the related analysis

shows the constructs to be distinct and unique, allow-
ing us to conclude that common methods bias is not
a concern for this study (Podsakoff, MacKenzie, Lee &
Podsakoff, 2003).
Several constructs were modified during the purifica-
tion process. The CFA unidimensionality and conver-
gent validity checks indicated that the CMPC and
of qualified suppliers

CMCA loaded better as a single construct, renamed

Phase 2: Evaluate

category strategy

CM competence (Garver & Mentzer, 1999). Addition-

selection criteria
• Identify a pool
Suppliers

ally, a reviewer suggested that offshoring items be

removed from the CM competence construct. These
• Develop a

items were removed and used to form a separate con-

• Develop

struct, labeled offshoring opportunity (OffOpp).

Table 3, showing overall model fit indices, refers to
the updated model with CM competence and OffOpp
constructs.
Reliability was assessed using Cronbach’s coefficient
alpha, with all but two of the constructs exceeding .70
(Churchill, 1979; Nunnally, 1978). Reliability for
materials/components

OEMPC and PC was .609 and .522, respectively,

Purchasing Strategy
Phase 1: Establish a

• Potential customer
strategy based on:
Build a purchasing

which can be considered acceptable for new scales

use and demand
• Supply market
• Manufacturing

(Churchill, 1979; Dunn, Seaker & Waller, 1994). Fur-

• Importance of

requirements

ther examination of PC revealed that although three

Maltz (1997).

items loaded significantly on the latent variable, factor

analysis

loadings for two of the items fell well below the

recommended .5 threshold (Hair, Black, Babin &
Anderson, 2010). Because the factor explained much
less than half of the variance in these two items, a

98 Volume 49, Number 3

 When Does Procurement Follow Manufacturing Out the Door

TABLE 3
Model Goodness-of-Fit Indicators

Direct Effects Indirect Effects

Model Model (Post hoc) Recommended
Measure of Fit CFA Ph 1–5 Ph 1–5 Values
Normed chi-square 1.38 1.35–1.39 1.45–1.50 <3.00
(189.0.4/137 df) (220.7–227.9/164 df) (254.4.–261.7/175 df)
Tucker–Lewis .97 .97 .96  .90
Index (NNFI)
Bentler’s .98 .98 .97  .90
Comparative
Fit Index (CFI)
Goodness-of-Fit .92 .92 .91  .90
Index (GFI)
Root mean .038 .036–.038 .041–.043  .08
square error of (.023–.050) (.022–.050) (.030–.054)
approximation
(RMSEA) (90% CI)

FIGURE 3
Estimated Direct Effects Model

Product Core
Competence
Contribution

Contract
Manufacturer
Competence

Original Equipment
Manufacturer
Procurement
Competence

Procurement
Competitive Outsourcing
Intensity

Supply Base
Maintenance

Product Offshoring
Commoditization Opportunity Significant (α=0.05)

Not Significant

July 2013 99
 Journal of Supply Chain Management

decision was made to use a single item factor in the (phases 4 and 5), OEMPC (phases 1 and 5), PC
structural model and treat it as an observed variable (phases 1, 2, 3, and 4), and procurement outsourcing
by fixing its error to zero (Kelloway, 1998). The CFA are statistically significant and of the expected sign,
reported in Table 3 does not include PC. OEMPC’s thus providing support for H2/H4, H3, and H6 for
low reliability and PC’s operationalization as an the relevant phases. The path between OffOpp and
observed variable are addressed further in the limita- procurement outsourcing is positive and significant
tions section. (for phases 1, 2, and 3). The remaining structural
paths are not statistically significant, and thus, H1 and
Structural Model Estimation and Results H5 are not supported.
The estimation of the structural model and the In the split-sample comparison models run to test
testing of research hypotheses followed a two-phase moderation, the chi-square difference tests were insig-
approach. First, a structural model estimating the nificant for all cases of PC, OEMPC, and SBM. We
direct effects of the independent variables on pro- thus conclude that there is no evidence of moderation
curement outsourcing for each phase was estimated. to support H7a, H7b, and H7c.
Second, moderation models were estimated to test
hypotheses 7a–c, again for each phase of the pro- Post Hoc Indirect Effects Model
curement framework. To test these moderating rela- The original theoretical model as hypothesized
tionships, the data were split into high and low examined only direct effects between the drivers and
competitive intensity (CI) groups, with both groups procurement outsourcing. Based on suggestions made
represented in the same model (Ping, 1998). Two during the review process, we also assessed an indirect
models are then compared: one in which the paths effects model to consider the ways in which some
of interest are fixed to be equal between low/high constructs might work through others in their impact
CI groups and another in which these paths are free on procurement outsourcing. An examination of mod-
to vary. A statistically significant chi-square differ- ification indices revealed potential relationships from
ence test is taken as evidence of moderation (Ping, PCCC to SBM to OEMPC. An additional relationship
1998). was indicated from OffOpp to CM competence. Based
Fit indices indicate that the structural models exhib- on these relationships, the indirect effects model was
ited good fit to the data (see Table 3). Figure 3 shows estimated for all five phases (see Figure 4). Table 3
the statistically significant paths among the variables shows that the models fit well with all fit indices
of interest. The paths between CM competence exceeding the good fit thresholds. The statistically sig-

FIGURE 4
Indirect Effects Model (Post Hoc)

Ph1; Ph2; Ph3; Ph4; Ph5(0.4) Contract

Offshoring
Manufacturer
Opportunity
Competence

Supply Base
Maintenance
Ph1; Ph2; Ph3; Ph4; Ph5(0.3)

Procurement
Outsourcing

Original
Equipment
Manufacturer
Procurement
Competence

Product Core
Competence Product
Contribution Commoditization

Significant (α=0.05)

Not Significant

100 Volume 49, Number 3

 When Does Procurement Follow Manufacturing Out the Door

nificant relationships in the post hoc indirect effects supplier monitoring) to a competent CM, while hesi-
model are shown in Figure 4 and are further elabo- tating to relinquish strategic activities unless necessi-
rated upon in the discussion section below. tated by the need for access to an unfamiliar and
international supply base.
US-based electronics manufacturers procurement
DISCUSSION AND IMPLICATIONS competence also shows unanticipated results. As an
The findings in this study validate some preheld OEM’s assessment of its own procurement ability
notions, while confounding others. Perhaps the most increases, it is reasonably expected to find a corre-
straightforward finding in both the direct effects and sponding disinclination to outsource this function.
indirect effects models is that PC displays a predicted Instead, both the direct and indirect effects models
and positive relationship with all procurement phases suggest that higher levels of OEMPC lead to an
except for supplier monitoring and measurement increasing desire to control the procurement frame-
(phase 5). A product that is highly commoditized and work “endpoints” — strategy development and sup-
already outsourced is likely a reasonable candidate to plier performance monitoring. Perhaps as long as
have procurement activities follow manufacturing and topline strategy and visibility are retained, the OEM is
flow to the CM. The various inputs are most likely to more likely to outsource supplier evaluation, selec-
be basics that are relatively easy to procure and buy in tion, and materials ordering to a CM, trusting that it
bulk. In this situation, no secrets or vital “crown jew- can strategically guide the process and that it will have
els” (in Venkatesan’s (1992) formulation) are being sufficient information to do so.
outsourced. The OEM’s retention of phase 5 may be In addition, over half of the respondents in this
explained by the fact that as long as the OEM retains sample were smaller firms (sales < 501M). Smaller
visibility via monitoring and feedback, its comfort firms may have less leverage or close supplier relation-
with a more wholesale outsourcing of procurement ships, in either case being more willing to seek pro-
activities is increased. curement support from the CM, maintaining control
On the other hand, CM competence, a construct over only the overall purchasing strategy and supplier
that was reasonably expected to drive broad outsourc- monitoring.
ing behaviors, was found to be more limited in scope While showing no significant impact in the direct
than hypothesized. In both the direct and indirect effects model, SBM and the manufactured product’s
effects models, CM competence was only found to core competence contribution (PCCC) work indirectly
influence the more tactical procurement phases of through other variables to influence procurement out-
day-to-day materials ordering and supplier monitoring sourcing in the indirect effects model. Logically, the
(phases 4 and 5). This is especially surprising given ability to maintain crucial supplier relationships
that sample firms were drawn from the electronics should correlate with increased perceptions of pro-
industry, known for its intense competition, rapid PC, curement competence, and so in the indirect effects
and the presence of large turn-key CMs positioning model, SBM is antecedent to OEMPC. In the indirect
themselves as “one stop shops” (Carbone, 1996a,b; effects model, increased SBM efforts lead to increased
Harrington, 2000). Perhaps this is simply a sign that perceptions of OEMPC, thus exerting a negative and
OEMs still view procurement as too strategic or core indirect impact on the outsourcing of purchasing
to fully outsource, and so entrust their CM partners strategy and supplier performance measurement.
with tactical activities only. If this trend holds in an Finally, PCCC seems to have a split personality with
industry where contract manufacturing is very mature, regard to procurement outsourcing. In the indirect
what does this suggest for other industries? effects model, it shows a positive relationship with
The CM competence results are more intriguing outsourcing day-to-day materials ordering. As this
when assessed together with those for OffOpp. In appears to be the most tactical and basic of the
both DE and IE models, an OEM’s desire to access various procurement phases, it makes sense that as
international markets and resources was linked to a the final product increases in importance to the OEM,
willingness to outsource strategic procurement activi- other activities in the procurement process will occupy
ties — strategy development, supplier evaluation, and the time of procurement personnel (although to be
selection — but not the more tactical activities of clear, theory predicts a negative relationship). In addi-
materials ordering and supplier performance measure- tion, PCCC displays a positive relationship to SBM
ment. This is in spite of the fact that as an OEM across all five procurement phases in the indirect
shows greater interest in international access, its per- effects model. It may be that PCCC has a negative
ception of general CM competence increases (the indi- relationship with procurement outsourcing, but that
rect effects model)! A plausible explanation for this its path is quite indirect: Increasing PCCC has a posi-
may be that an OEM is willing to outsource the tacti- tive relationship with SBM efforts, which in turn
cal aspects of procurement (day-to-day ordering and increase perceptions of OEMPC, which in turn make

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 Journal of Supply Chain Management

the outsourcing of strategy and monitoring activities key leverage and competence aspects underlying the
to the CM less likely. Admittedly, this is a somewhat results are useful starting points for considering the
convoluted path, but it helps explain the lack of a decision to outsource or retain procurement from a
direct negative correlation as predicted by theory. A purely functional perspective, regardless of the status
second explanation may be that the OEMs in this of other functions. Such frameworks might be devel-
sample are mostly responding with noncore products oped to consider the drivers and inhibitors of general-
in mind (i.e., they do not outsource manufacturing ized outsourcing “cascades,” where the decoupling of
for core products, so these are barely represented in one function may lead to a succession of similar deci-
the sample data to begin with). In this case, it makes sions across the company.
sense that the perceived importance of the product In line with this, a third contribution is to suggest
would show insignificant or minor effects. ways in which internal organization may be researched
When the direct and indirect effects models are con- in light of the ever-present specter of outsourcing in the
sidered holistically, it can be broadly speculated that modern business environment. When considering pro-
firms are still hesitant to engage in wholesale procure- curement competence and product competitive contri-
ment outsourcing. In the absence of high PC or inter- bution, it may be that procurement organizations of
national opportunities, OEMs seem to consider their the future will increasingly bifurcate, with internal pro-
CM partners to be single-stop “tollgates,” outsourcing curement functions focusing on more strategic or inno-
mostly tactical activities to them. The uncertainties vative products, while efficient service providers
and potential gains from international opportunities procure materials for more stable, mature products.
seem to change this dynamic, with a far greater will- Fourth, this study provides a partial empirical valida-
ingness to entrust CMs who control crucial interna- tion of the McIvor (2009) TCE-RBV synthesis. The
tional resources with strategic procurement activities. study has focused upon the areas where TCE and RBV
A final thought in concluding this section is that the offer complementary explanations of organizational
impacts of various procurement outsourcing drivers behavior, and has found the contextual situations in
can best be described as piecemeal. Few relationships which this seems to hold true. It has also found situa-
in this study hold across all five procurement phases. tions in which predicted relationships did not hold, or
This is understandable given that while the initial lit- held in the opposite direction predicted by theory.
erature review for this study was sufficient to suggest When combined with the granular nature of the depen-
constructs that might plausibly foster (or discourage) dent variable (procurement activities split into buckets
procurement outsourcing, the term “procurement” of varying strategic impact), this study provides a fertile
covers a lot of ground. Procurement is split into many ground for future research.
different activities, and these can be codified in many For practitioners, study results provide a way to
ways — strategic impact, cycle time, and specific assets assess their outsourcing decisions in light of their
required to name a few. While this study provides a CM relationships. It will also help them to consider
level of granularity in assessing procurement activities which procurement activities are logical candidates
that is not often seen, the result is that more ques- for follow-on outsourcing and which are best
tions are raised than answered. retained in-house. It is possible that these results
could even become part of the decision to outsource
manufacturing (or not) in the first place, if the
CONTRIBUTIONS, LIMITATIONS, AND thought is that a materials procurement outsourcing
FUTURE RESEARCH push will inevitably follow. In either case, managers
This study makes a number of contributions. First, should be aware that while some factors are potential
it contributes to our understanding of whether enablers or inhibitors of this decision, others that
(and if so why) there is a “cascade” in functional seem important may not be worth as much time and
outsourcing — once manufacturing leaves the nest, consideration while plotting the best course of
can procurement be far behind? The answer as far as action. Executives in contract manufacturing organi-
we can tell is decidedly mixed — some sets of condi- zations might use these results to consider how to
tions appear to lend themselves to a more “whole- best market themselves to potential customers and to
sale” outsourcing approach. Conversely, other consider the optimal package of procurement offer-
conditions foster a more “retail” approach to out- ings to offer.
sourcing, with little to no follow-on outsourcing of
the procurement activities connected to the outsour- Limitations and Future Research
ced final product in question. This study has a number of limitations that may
Second, study findings point the way toward devel- restrict the application of results. First, the focus on a
oping a more comprehensive framework for under- single industry, the electronics industry, may limit
standing procurement outsourcing in general — the the generalizability of results. Second, the OEMPC

102 Volume 49, Number 3

 When Does Procurement Follow Manufacturing Out the Door

scale suffers from low reliability, which, while accept- as centralization and formalization play a role in
able in exploratory scales, likely indicates the need this decision? What effect is played by industry type
for further scale development in future studies. This and how do services firms view this decision?
is a cross-sectional survey, and so gives only a snap- Recent articles have called attention to the risks
shot in time, whereas longitudinal work is likely inherent in shooting beyond an optimal level of
needed to get a more holistic sense of how outsourc- outsourcing (Choi & Linton, 2011) or in outsourc-
ing evolves over time. Third, PC was used in the ing a function that is insufficiently modular with
structural model as a single item factor due to two another one (Pisano & Shih, 2012) — what are the
factor loadings well below .5. This approach treats implications for procurement outsourcing if it turns
the single item factor as an observed variable fixing out one can indeed outsource too much, or the
the error at zero. That PC has zero error is not a “wrong” activity set? The answers to any of these
strong assumption (Kelloway, 1998). However, the questions would, in our opinion, enrich our under-
item used consistently demonstrated factor loadings standing of the role procurement plays, and will
over .8, indicating the majority of variance was play, in competitive organizations.
explained by the factor (Hair et al., 2010). The single
item factor performed very well and as predicted in
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fection. The American Economic Review, 61, Bryan Ashenbaum (Ph.D., Arizona State University)
112–123. is an associate professor of supply chain management
Williamson, O. E. (1985). The economic institutions of in the Department of Management, Farmer School of
capitalism. New York, NY: The Free Press. Business, at Miami University in Oxford, Ohio. His
Williamson, O. E. (1986). Economic organization. research interests are in supply chain integration and
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boundary behavior, and in the “human factor” in sup-
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agement Journal, 20, 1087–1108. baum has conducted research projects that examine
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Journal of Supply Chain Management, 44, 5–16. outsourcing, and the effect of dispositional traits, as
Zeng, A. (2003). Global sourcing: Process design for described in organizational behavior literature, on
efficient management. Supply Chain Management, actors in the supply chain. His work has been pub-
8, 367–379. lished in a wide variety of journals, including the Jour-
Zsidisin, G. A., & Ellram, L. M. (2001). Activities nal of Business Logistics, the Transportation Journal, the
related to purchasing and supply management Journal of Supply Chain Management, and the Interna-
involvement in supplier alliances. International
tional Journal of Logistics Management.
Journal of Physical Distribution & Logistics Manage-
ment, 31, 617–634.
Joseph R. Carter (Ph.D., Boston University) is the
Avnet Professor of Supply Chain Management in the
W. P. Carey School of Business at Arizona State Uni-
versity in Tempe, Arizona. He also holds CPSMâ and
C.P.M. certifications from the Institute for Supply
Barry L. Brewer (Ph.D., Arizona State University) is ManagementTM. Dr. Carter’s research is focused in
an associate professor of decision science in the three major content areas: Buyer and supplier commu-
Department of Management and Marketing, College nication processes and information exchange systems;
of Business, at the University of Wyoming in Laramie, international sourcing and supply chain management
Wyoming. His research interests are in the areas of issues; and strategic procurement. His research has
outsourcing, supply chain trust, and the interface of been appeared in publications that include the Supply
new product development with supply chain manage- Chain Management Review and the Journal of Supply
ment. Dr. Brewer also has experience as a practitioner, Chain Management, for which he serves as an Associate
having served as a logistics officer with the United Editor.
States Air Force. His research has been published in
outlets that include the International Journal of Physical
Distribution and Logistics Management.

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 APPENDIX A
COEFFICIENT ALPHA, FACTOR LOADINGS, AND SIGNIFICANCE FOR SURVEY ITEMS

Likert-scale Standardized
Likert-scale High Anchor Average Factor
Latent Variable (All Loadings Significant at a p-value <.01) Low Anchor (1) (7) (SD) Loadings
Product competitive items arranged by contribution: a = .758
How important was the lack of internal manufacturing capacity Not Important Very Important 4.3 (2.1)
in the decision to outsource manufacturing?a
How important was this product or major subsystem to your Not Important Very Important 5.3 (1.6) .75
firm’s core competence strategy?
How important were components of this product or major Not Important Very Important 5.0 (1.6) .76
subsystem to your core competence strategy?
To what extent did the manufacturing of this product or Very Little Very Much 4.7 (1.6) .63
subsystem depend on firm core competencies?
How big was your company (in terms of sales) compared to Very Small Very Large 4.8 (1.5)
other companies in your industry?a
Contract manufacturer competence: a = .765
Contract manufacturer competitive advantage
How important was CM design knowledge in the decision Not Important Very Important 4.2 (1.8)
to outsource manufacturing?a

July 2013
How important was CM manufacturing knowledge in the Not Important Very Important 5.6 (1.4)
decision to outsource manufacturing?a
How important were CM manufacturing costs in the decision Not Important Very Important 6.1 (1.1)
to outsource manufacturing?a
How much control did the CM have over the product Very Little Substantial 3.1 (1.7)
specifications (component selection, qualification, etc.)?a
How big was the CM in terms of sales compared to other CMs Small Large 4.3 (1.4) .54
in the industry?
When Does Procurement Follow Manufacturing Out the Door

Contract manufacturer procurement competence

How important was CM leverage with their suppliers in your Not Important Very Important 4.3 (1.7) .88
decision to outsource or retain procurement?
How important was lack of CM leverage with their suppliers Not Important Very Important 3.8 (1.8)
in your decision to outsource\retain procurement?a
How important was the CM’s procurement competence in your Not Important Very Important 4.7 (1.6) .79
decision to outsource or retain procurement?
How centralized was the CM’s procurement function?a Decentralized Centralized 4.9 (1.6)
How competent was the CM’s procurement function? Not Competent Very Competent 4.8 (1.2) .49
(continued)

107
108
APPENDIX A (continued).
Likert-scale Standardized
Likert-scale High Anchor Average Factor
Latent Variable (All Loadings Significant at a p-value <.01) Low Anchor (1) (7) (SD) Loadings
How important was integration between CM manufacturing and Not Important Very Important 4.6 (1.5)
procurement?a
How important was gaining access to critical resources through Not Important Very Important 4.3 (1.6)
the CM?a
How was the CM’s procurement function performance at the time Poor Excellent 4.6 (1.1)
of the outsourcing decision?a
OEM procurement competence: a = .609
How much did your procurement function contribute to lasting firm Very Little Substantially 4.9 (1.4) .51
competitive advantages?
How would you describe your procurement function’s performance Poor Excellent 5.3 (1.2)
at the time of the outsourcing decision?a
How important was the potential loss of control of critical resources? Not Important Very Important 4.4 (1.7) .53
How important was your firm’s existing procurement leverage? Not Important Very Important 4.6 (1.7) .74
How centralized was your procurement function at the time of the Very Decentralized Very Centralized 5.1 (1.7)
outsourcing decision?a,b
What level of integration between procurement and other company Little Integration High Integration 5.0 (1.4)
functions was required for this product?a
Supply base maintenance: a = .861

Volume 49, Number 3

How important was keeping existing supplier relationships in your Not Important Very Important 4.9 (1.7) .84
decision to outsource or retain procurement?
How important was keeping your product’s existing supply base intact? Not Important Very Important 4.8 (1.6) .88
Journal of Supply Chain Management

How important were existing suppliers to other products Not Important Very Important 4.5 (1.7) .74
you manufacture?
How important were existing supplier agreements in your decision to Not Important Very Important 4.4 (1.8)
outsource or retain procurement?a
What level of computer-enabled transaction processing did you have Very Low Very High 4.1 (1.7)
with existing suppliers?a,c
Competitive intensity: a = .704
What was the level of market competition for your Very Low Very High 5.2 (1.5)
product or subsystem?a,b
What was the pace of technological change for this type of product Slow Fast 4.5 (1.7) .61
or subsystem?b
What was the rate of product obsolescence for this type of product Very Low Very High 3.8 (1.6) .75
or subsystem?b
(continued)
 APPENDIX A (continued).
Likert-scale Standardized
Likert-scale High Anchor Average Factor
Latent Variable (All Loadings Significant at a p-value <.01) Low Anchor (1) (7) (SD) Loadings
What was the rate of manufacturing obsolescence for this type of Very Low Very High 3.3 (1.4) .66
product or subsystem?b
How would you describe the availability of substitutes for your product Very Low Very High 3.4 (1.6)
or subsystem?a
Indicate the threat of new competitors entering the market with similar Very Low Very High 4.2 (1.6)
products or subsystems?a
Product commoditization: a = not applicable
How would you describe the specification maturity of this product or Very Unstable Very Stable 5.0 (1.3)
subsystem?d
How standardized were the direct materials of the Unique Very Standardized 4.4 (1.5)
product or subsystem?e
For this product, how were the majority of supplier relationships prior to Close/Cooperative Arms Length 3.1 (1.4)
retaining/outsourcing procurement?a
For the product, what was the intended length of the Long Term Short Term 2.9 (1.4)
majority of suppliers?a,b
How differentiated was your product or subsystem from similar Highly Very Little 3.8 (1.5)

July 2013
products or subsystems?e
Offshoring opportunity: a = .854
How important was entering international markets in your decision to Not Important Very Important 3.7 (2.1) .92
outsource manufacturing?
How important was gaining access to international infrastructure (logistics, Not Important Very Important 3.4 (2.0) .87
marketing, after-sales support, etc.)?
How important was gaining access to low-cost international resources Not Important Very Important 4.8 (2.2) .67
(labor, materials, etc.)?
When Does Procurement Follow Manufacturing Out the Door

a
Items dropped during scale purification.
b
Krause (1995).
c
Chen and Paulraj (2004).
d
Used in structural model as a single item for PC.
e
Eliminated from PC due to standardized factor loading well below .5.

109
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APPENDIX B
CONSTRUCT CORRELATIONS AND DESCRIPTIVE STATISTICS

Mean SD 1 2 3 4 5 6 7
1. Product core competence contribution 4.98 1.29 1.00
2. CM competence 4.52 1.15 .19 1.00
3. OEM procurement competence 4.64 1.20 .19 .25 1.00
4. Supply base maintenance 4.72 1.49 .24 .16 .56 1.00
5. Competitive intensity 3.85 1.22 .15 .18 .21 .21 1.00
6. Product commoditizationa 5.01 1.28 .07 .09 .08 .01 .25 1.00
7. Offshoring opportunity 3.99 1.84 .05 .40 .19 .12 .15 .04 1.00
CM, contract manufacturer. Bolded correlations are significant at p < .05.
a

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Single item factor.
Journal of Supply Chain Management