KNOWLEDGE LINK
Outsourcing research by Fisher professor receives
Decision Sciences Institute award

With the recent rash of recalls involving products outsourced by manufacturers, a study by a Fisher professor provides compelling empirical evidence that outsourcing can have a serious impact on the quality of goods.

Studies exploring the practice by John Gray, assistant professor of operations in the Department of Management Sciences, received an award by the Decision Sciences Institute.

The institute’s 2007 Elwood S. Buffa Doctoral Dissertation Award was given to Gray for his dissertation, “Essays on Manufacturing Outsourcing.” Co-sponsored by McGraw-Hill/Irwin. The competition identifies and recognizes outstanding doctoral research in the development of theory or applications of the decision sciences.

In Gray’s three-essay dissertation, he addresses how key operations characteristics and strategies related to cost, quality and learning rate affect outsourcing decisions.

Over the last decade, there has been a dramatic increase in the practice of outsourcing in the manufacturing industry. However, little is known about the relationship between a manufacturer’s competitive capabilities and outsourcing strategies.

“Through the three independent but related essays, this dissertation enhances the existing economic theory of outsourcing, by explicitly bringing operations-based capabilities into the conceptual, analytical and empirical literature,” according to Gray.

The first essay was a game theoretic model examining outsourcing strategies in the presence of learning-by-doing and powerful contract manufacturers.

“Our findings demonstrate the importance of considering path-dependent cost capability, the dynamic nature of outsourcing relationships and the influence of powerful contract manufacturers in outsourcing decisions,” Gray said.

The second essay examined 867 manufacturing business units to determine the factors that led to outsourcing.

“That study concluded, not surprisingly, that cost was a major influence in outsourcing plans,” Gray said. “Surprisingly, however, the study found that quality considerations seemed to have minimal impact.”

The last essay examined quality risk in outsourcing in the drug industry using Food and Drug Administration inspection data. The study found that contract manufacturers pose a greater quality risk than internal plants, and that ISO 9000 certification seems to do little to mitigate this risk.

“This third essay links to the second essay, which showed that firms do not consider quality in outsourcing decisions. Here, we showed that quality should be considered, as outsourcing can pose a quality risk,” Gray said. He added, “This essay will be the baseline for much of my future research, which will explore such areas as quality risk in offshoring, as well as product, environmental and behavioral contingency factors that can affect the both the magnitude and importance of this quality risk in outsourcing.”