Managing contract manufacturer quality in the presence of performance ambiguity

• Date: 01 September 2015
• Author: John V. Gray,Sean M. Handley
• Published date: 01 September 2015
• DOI: http://doi.org/10.1016/j.jom.2015.08.002

Journal

of

Operations

Management

38

(2015)

41–55

Contents

lists

available

at

ScienceDirect

Journal

of

Operations

Management

j

o

ur

na

l

ho

mepage:

www.elsevier.com/locate

/jom

Managing

contract

manufacturer

quality

in

the

presence

of

performance

ambiguity

John

V.

Graya,∗,

Sean

M.

Handleyb

aFisher

College

of

Business,

The

Ohio

State

University,

2100

Neil

Avenue,

Columbus,

OH

43210,

USA

bMendoza

College

of

Business,

University

of

Notre

Dame,

Notre

Dame,

IN

46556,

USA

a

r

t

i

c

l

e

i

n

f

o

Article

history:

Received

7

March

2014

Received

in

revised

form

17

June

2015

Accepted

8

August

2015

Available

online

20

August

2015

Accepted

by

Daniel

R.

Guide

Keywords:

Total

quality

management

Buyer-supplier

relationships

Measurement

perspective

Relational

view

Organizational

control

Theory

of

the

firm

Supply

chain

management

a

b

s

t

r

a

c

t

Brand-owing

firms

have

been

outsourcing

the

production

of

complete

finished

products

to

contract

man-

ufacturers

(CMs)

for

some

time.

Increasingly,

brand-owning

firms

have

been

employing

CMs

to

produce

products

for

which

performance

ambiguity

is

high.

Doing

so

poses

challenges

for

the

management

of

CM

performance.

As

expected,

we

find

that

quality

performance

ambiguity

has

a

significant

negative

rela-

tionship

with

CM

conformance

quality

performance,

as

reported

by

the

buyers

(the

brand-owning

firms).

Drawing

from

and

expanding

the

quality

management

(QM)

literature,

we

assess

the

effectiveness

of

key

constructs,

derived

primarily

from

the

“supplier

QM”

meta-construct,

at

mitigating

the

detrimental

effect

of

ambiguity.

Two

constructs

consistently

moderate

the

ambiguity-CM

quality

performance

link.

Heavily

emphasizing

quality

at

the

time

of

CM

selection

moderates

this

relationship

in

the

expected

direction

(i.e.,

it

mitigates

the

challenges

created

by

ambiguity).

Surprisingly,

we

find

that

using

one

CM

ampli-

fies

the

negative

relationship

between

ambiguity

and

conformance

quality

performance.

One

possible

explanation

is

that

employing

only

one

CM

aggravates

existing

opportunism

concerns

with

regard

to

conformance

quality

performance

under

high

levels

of

ambiguity.

©

2015

Elsevier

B.V.

All

rights

reserved.

1.

Introduction

Outsourcing

part,

component,

and

material

production

is

a

well-established

practice

in

operations

and

supply

chain

man-

agement

(Hayes

et

al.,

2005).

Outsourcing

the

production

of

complete

finished

products

to

contract

manufacturers

(CMs)

has

intensified

since

the

1990s

in

the

electronics,

pharmaceutical,

automotive,

and

food/beverage

industries,

among

others

(Brewer

et

al.,

2013;

Plambeck

and

Taylor,

2005;

Tully,

1994).

Finished

products

outsourced

to

CMs

are

not

shipped

back

to

the

buyer,

typically

a

brand-owning

firm,

for

further

processing

(Arru˜

nada

and

Vázquez,

2006).

Unlike

outsourcing

parts

or

materials,

buyers

face

heightened

outgoing

product

quality

risks

with

CMs,

having

less

opportunity

to

detect

CM-generated

defects

before

finished

products

hit

the

market.

Compounding

this

risk,

some

firms

out-

source

products

with

high

levels

of

performance

ambiguity,

which

Stump

and

Heide

(1996;

p.

436)

define

as

“the

inherent

diffi-

culty

faced

by

the

buyer

in

accurately

evaluating

the

supplier’s

∗Corresponding

author.

Fax:

+1

614

292

1272.

E-mail

addresses:

gray.402@osu.edu

(J.V.

Gray),

shandley@nd.edu

(S.M.

Handley).

performance.”1Building

on

this,

we

define

quality

performance

ambiguity

as

situations

in

which

firms

are

outsourcing

production

where

it

is

difficult

to:

(1)

ensure

process

and

product

specification

conformance

through

finished-product

testing

[low

testability],

(2)

ensure

process

requirement

conformance

through

direct

observa-

tion

[low

monitorability],

and/or

(3)

determine

whether

an

external

failure

is

attributable

to

the

buyer

or

CM

[low

root-cause

assignabil-

ity].

As

we

elaborate

in

the

next

section,

these

dimensions

are

derived

from

the

organizational

control

literature

(e.g.,

Eisenhardt,

1985)

and

the

largely

analytical

literature

on

incentivizing

CMs

and

suppliers

to

improve

quality

performance

(e.g.,

Baiman

et

al.,

2001);

both

of

these

literature

streams

draw

from

the

measure-

ment

perspective

from

the

theory

of

the

firm

literature

(e.g.,

Alchian

and

Demsetz,

1972).

This

study

contributes

to

the

supply

chain

quality

management

(QM)

literature

by

examining

how

quality

performance

ambiguity

directly

influences

CM

conformance

qual-

1We

note

there

is

a

concept

called

“causal

ambiguity”

(Lippman

and

Rumelt,

1982;

King

and

Zeithaml,

2001;

Powell

et

al.,

2006)

in

the

strategy

literature

specif-

ically

focused

on

how

firms

achieve

sustainable

competitive

advantage.

There,

the

term

refers

to

ambiguity

in

the

path

to

achieving

certain

capabilities,

ultimately

serving

as

a

barrier

to

imitation.

While

the

underlying

meaning

—

the

inability

to

tie

performance

outcomes

to

specific

causes

—

is

closely

related,

our

construct

is

more

narrow.

http://dx.doi.org/10.1016/j.jom.2015.08.002

0272-6963/©

2015

Elsevier

B.V.

All

rights

reserved.