Outsourcing direct materials procurement in an outsourced manufacturing arrangement

In the current business environment, outsourcing is a common tool firms use to lower costs, attain access to technology, and to focus on core competencies. Procurement outsourcing is beginning to increase for nonstrategic or indirect purchases. However, outsourcing the procurement of direct materials occurs very infrequently. One exception to limited outsourcing of direct materials is the context of contract manufacturing. When outsourcing the manufacturing of a product or subassembly, original equipment manufacturers (OEM) enter a decision process to retain or outsource the procurement of direct materials for their contracted manufacturing activity. This study examined this phenomenon to determine how decision factors impact the level of procurement outsourcing. To firmly base this study on existing theory the frameworks of transaction cost economics and resource-based view were used to examine how the factors of procurement outsourcing impact the outsourcing decision. An internet survey methodology was implemented to collect data from purchasing managers in the electronics industry for theory building through hypothesis testing.; This research resulted in a greater understanding of procurement outsourcing. The primary contribution better characterized the relationship of drivers to the procurement outsourcing decision in the context of outsourced manufacturing. OEM procurement competence and leverage reduced levels of procurement outsourcing while Contract Manufacturer (CM) manufacturing competence, procurement competence, and leverage increased procurement outsourcing. Additionally, CM procurement competence and competitive advantage were merged to a single latent construct during unidimensionality testing. CM manufacturing capabilities could not be separated from procurement capabilities. Six procurement arrangements were identified through cluster and discriminant analysis. These arrangements indicate three levels of outsourcing with two arrangements at each level based on different decision variables. Discriminant analysis identified three dimensions that identified over 98% of the variance of the six arrangements. The dimensions of CM leverage, CM control of critical direct materials, and OEM leverage had high predictive power for discriminating between the groups.; This research extends current theoretical paradigms of procurement and outsourcing and builds outsourcing knowledge that will enable practitioners and managers to better evaluate the decision to outsource direct materials procurement. Future research should apply the principles supported to other industries and other contexts.