TY - JOUR
T1 - Impact of sourcing flexibility on the outsourcing of services under demand uncertainty
AU - Benaroch, Michel
AU - Webster, Scott
AU - Kazaz, Burak
N1 - Funding Information:
This study was carried out with funding from the Graduate School Doctoral Student Aid Program, Keio University, Japan. This publication was made possible by funding from the Graduate School Doctoral Student Aid Program, Keio University 2013. I would like to show my greatest appreciation to translators of Japanese version of Decision Regret Scale (DRS-J) whose enormous support and insightful comments were invaluable during the course of my study.
PY - 2012/6/1
Y1 - 2012/6/1
N2 - This paper investigates the relationship between market conditions and the value and use of sourcing flexibility for service processes. We develop and analyze a series of models, and we derive expressions for the optimal switching decision, the value of the option to outsource, the value of the option to backsource, and the probability and timing of switches between the alternative sources. One contribution is the models and associated derivations, which are largely new to the literature and may serve as a tool to support service sourcing plans and decisions. The second contribution is a series of results with managerial implications: (1) The probability of outsourcing is generally increasing in volatility for high-skill process and decreasing in volatility for low-skill processes. Earlier work has found that the hysteresis band is increasing in volatility, which is interpreted as an indicator of increasing organizational inertia. We also find that the hysteresis band is increasing in volatility, but interestingly for the case of high-skill processes, organizational inertia tends to be decreasing in volatility. (2) The option to backsource is generally more valuable for high-skill processes than for low-skill processes. This result suggests that investments to make it easier to backsource should have a higher priority for high-skill processes. (3) The value of the option to backsource a high-skill service process can be decreasing in volatility. The result suggests that a rather nuanced consideration of volatility is in order when considering investments in the flexibility to backsource a high-skill process.
AB - This paper investigates the relationship between market conditions and the value and use of sourcing flexibility for service processes. We develop and analyze a series of models, and we derive expressions for the optimal switching decision, the value of the option to outsource, the value of the option to backsource, and the probability and timing of switches between the alternative sources. One contribution is the models and associated derivations, which are largely new to the literature and may serve as a tool to support service sourcing plans and decisions. The second contribution is a series of results with managerial implications: (1) The probability of outsourcing is generally increasing in volatility for high-skill process and decreasing in volatility for low-skill processes. Earlier work has found that the hysteresis band is increasing in volatility, which is interpreted as an indicator of increasing organizational inertia. We also find that the hysteresis band is increasing in volatility, but interestingly for the case of high-skill processes, organizational inertia tends to be decreasing in volatility. (2) The option to backsource is generally more valuable for high-skill processes than for low-skill processes. This result suggests that investments to make it easier to backsource should have a higher priority for high-skill processes. (3) The value of the option to backsource a high-skill service process can be decreasing in volatility. The result suggests that a rather nuanced consideration of volatility is in order when considering investments in the flexibility to backsource a high-skill process.
KW - Backsourcing
KW - Demand uncertainty
KW - Real options
KW - Services outsourcing
UR - http://www.scopus.com/inward/record.url?scp=84857051658&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84857051658&partnerID=8YFLogxK
U2 - 10.1016/j.ejor.2011.12.007
DO - 10.1016/j.ejor.2011.12.007
M3 - Article
AN - SCOPUS:84857051658
SN - 0377-2217
VL - 219
SP - 272
EP - 283
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 2
ER -