Essays on sourcing strategies and inventory management : theory and empirical evidence

In this thesis, we study three issues on decision makings on supply side of supply chain management. It contains two theoretical models on outsourcing strategies and one empirical study on inventory management in China. We firstly study a brand-name buyer that outsources the manufacturing of a product whose demand depends on its design quality. For the product design the buyer has two options: He can either keep the design in-house or outsource the design together with the manufacturing. We derive the equilibrium design level for either option and compare the supply chain performance. Our analysis indicates that outsourcing product design may reduce design quality, which may in turn damage the reputation and market share of the brand-name buyer. Thus, even though the buyer achieves a cost reduction via off-loading the design burden in this case, he may be worse off because the loss due to inferior design can exceed the design-cost reduction. We discuss practical ways out of the dilemma: The buyer may specify design requirements explicitly in a contract offered to his manufacturer or share the design cost with the manufacturer. We also show that the two parties can negotiate a quantity discount scheme to maintain the design quality in product design outsourcing. In the second problem, we examine a supply chain with a single supplier who has limited capability which affects the final sales. In the single buyer setting, we compare the performances in two scenarios of capability improvement, one with the supplier's own investment and the other with the buyer's investment. Our analysis reveals the conditions under which the buyer's direct investment will be preferred. We then extend the study to a case with two competing buyers. We find that the buyer with a higher market share tends to invest in the supplier's capability improvement when both buyers make their investment decisions simultaneously. When they make the decisions sequentially, the follower is more likely to invest. While China is gradually becoming the global manufacturing hub, many people tend to believe the competitiveness of Chinese firms comes mainly from low labor and material costs, and the logo of 'Made in China' oftentimes represents cheap products with low quality, which renders an impression of inferior management by the firms that manufacture the products. In the third problem, we examine the operational performance of firms in China via studying their inventory management. Specifically, we apply an empirical method to investigate the inventories of 1253 public firms. We find that on average the inventories decline at an annual rate of 3.3% and the firm-level data is well consistent with several hypotheses derived from classical inventory models. Therefore, our results indicate that inventory management at the Chinese firms has been improved noticeably and that the external impression of low operational performance may not truly represent the status quo of the industries in China