The Use of IntermediateSourcing StrategiesAUTHORSKir.docx

The Use of Intermediate
Sourcing Strategies
AUTHORS
Kirk C. Heriot
is associate professor of business administration at North
Georgia
College & State University in Dahlonega, Georgia.
Subodh P. Kulkarni
is assistant professor of management in the School of Business
at
Howard University in Washington, D.C.
Much of the existing literature discusses vertical inte-
gration and competitive spot bidding as sourcing
strategy choices, but often neglects intermediate
sourcing strategies, such as taper integration and
long-term supplier relationships. This exploratory
study examines the extent to
SUMMARY which firms use intermediate
sourcing strategies, as opposed
to the polar strategies, and attempts to improve our
understanding of the sourcing choices available to
manufacturing firms. Results from.a sample of 209

plant managers indicate that firms use taper integra-
tion and long-term supplier relationships more fre-
quently than vertical integration and competitive
spot bidding. Further, the choice of a sourcing strategy
was found to be dependent on the industry.
The Journal of Supply Chain
Management A Global
Review of Purchasing
and Supply Copyright
( February 2001, by the
National Association of
Purchasing Management, Inc.
INTRODUCTION
A firn's sourcing decisions involve the choice of securing
inputs to its operations. The sourcing decision is variously
termed the "market-hierarchy choice," "vertical integra-
tion," or the "make-or-buy" decision. At the extreme, a
-fin may choose to completely outsource or completely
internalize its production.
Market (outsourcing) and hierarchy (vertical integra-
tion) are, however, endpoints of a continuum of sourcing
strategies. Some of the intermediate sourcing strategies
incdude taper integration and long-term cooperative rela-
tionships (Landeros and Monczka 1989). Much of the
existing literature focuses on the "bipolar" choice of out-
sourcing and vertical integration (Williamson 1985).
Traditionally, the selection of a sourcing strategy involves
a static comparison of the costs of outsourcing and ver-
tical integration with not much consideration for the
intermediate strategies.
Recently, Hennart (1993) asserted that firms are more

likely to select intermediate sourcing strategies than out-
sourcing or vertical integration. However, there is little
empirical evidence that the distribution of sourcing
strategies differs across firms. If firns overwhelmingly
used either outsourcing or vertical integration, it would
mean that the sourcing decision is essentially limited to
these two choices. On the other hand, a significant occur-
rence of intermediate sourcing strategies may indicate
that managers need to broaden their strategic repertoire.
Hennart (1993) stated that the criteria for the selection
of intermediate sourcing strategies are not ciear. Tradition-
ally, researchers have used a "comparative-static" approach
to evaluate the choice of sourcing strategies (e.g., Wllliamson
1985). This usually involves a simultaneous comparison
of the costs of outsourcing and vertical integration, over-
looking the intermediate strategies. Given the relative
lack of theory in this area, there is a need for exploratory
studies that examine whether the distribution of sourcing
strategies is different across firms. Exploratory studies
generally form the first important step in theory devel-
opment (Schendel and Hofer 1979).
The primary purpose of this article is to identify the
extent to which manufacturing firms use various
18 The Journal of Supply Chain Management I Winter 2001
Authors' note: The authors' names are listed in alphabetical
order.
.- ' -1 4 ; 1 ~ ;, ': ;, '1 ! , H lt q- ' F ' . The Use of Internnediate
Sourcing Strategies
- i- Y"f-i eA,^ff

intennediate sourcing strategies. The selection of an as sourcing
alternatives. Barter. denotes a purchase of
appropriate sourcing-strategy can be important for a goods (dr
services) by a finm in exchange for the goods
fiEm's competitive advantage when the sourcing strategy or
services of another. This type of sourcing strategy
is-"aligned" with the underlying costs (Hayes and Wheel- often
offers.substantial tax advantages (Malitz 1998).
wright-1984; also see Willliamson.1991a). This.article does-
Countertrade arrangements often involve firms from dif-
not discuss when intermediate strategies (as opposed to ferent
countries. The importing firm can use a number
the "bipolar" strategies) can generate a competitive' *of
different types of assets to repay exporters depending
advantage. However;-it is conceivable that managers on the type
of project, including goods and services,
may overlook the intermediate strategies because of (Forker
1997). Sole sourcing involves a contractual rela-
their limited knowledge'of sourcing choices, thereby. tionship
with one supplier. Multiple sourcing; on the
-jeopardizing a,firmn's competitive advantage. Therefore, other
hand, involves dealing with a number of suppliers. . -
it is important to know whether, and to what extent, This offers
a firm protection against opp6rtunistic.sup-
managers have a strategic choice other than-vertical pliers
(Richardson 1993). ; -
integration and outsourcing. , - -
The remainder of this article is organized as foliows.
THEORETICAL BACKGROUND -
Tirst,-the types of sourcing decisions are briefly described.
Transaction Cost Economics -
Second, the theory underlying the choice of a sourcing
Transaction cost economics (TCE) .has emerged as a .
strategy is examined. Third, the frequency of sourcing theory

that explains the choice of a asourcirg strategy
-decisions is investigated empirically. Finally, conclusions
(Coase 1937; Williamson 1975, 1985). TCE corisiders -
and implications of.the research are discussed-. the behavioral
implications of the econormic actors -
TYPESO OURCING TRATEE . '. -involved in sourcing
decisions. Transaction costs, or. -.:
the costs of drafting, negotiating, monitoring, and. .
.A firm's sourcing strategies may include-vertical inte-
enforcing asourcing contract, increase because-of the
gration, taper integiation, long-term cooperative rela-
.~bounded rationlality and opportunism on the.part of
tionships, and competitive spot biddink (Landeros anda p~~
1989) . . a ~~~~~~~~~firin'~ mianagers and suppliers. Bounided
rationality-'
Mmeans that managers are intendedly rational, but only
Vertical integration is the combination of technologi- 'Iimitedly
so (Simon 1961). Opportunism means self-
cally distinct production, distribution, selling, and/or - interest s
wt mson 1985). . -- -
other economic processes within the confines of a single .
Transaction costs are largely influenced'bythree tans-
firm. ItJis also a dedsion to use internal or administrative
action-parameters: asset specificty, uncertainty and the
mechanisrms -the hierarchy as Williamson (1975) noted, -
frequency of transaction. Asset specfaty refers to the (lack
rather than market transactions, to secure nee&d inputs. of ease
with which the human ca
Vertical integration requires that a fudndamental commit- ical
assets, and es petal (employe phys-
ment be made to produce items in-house. fclt pcfclyte otemnfc

ment be.made to produceitemsin-ture of an item.can.be:used by
alternative users or put
Taper integration is a combination of vertical;integra- to
alternative uses. Transaction-specific assets'lock trans- ' '
.tion and spot-bid contracts. It.means that a firm buys, acting
parties into a bilaterally dependent -relationship,
a particular input from outside suppliers in addition to thereby
increasing transactionicosts. Similarly, recumring
making it in-house (Harrigan.1984). Taper integration
transactions are subject to-frequent haggling'with'sup-
requires a firn to manage its own production of the input,
pliers'. Asset specificity is perhaps the most important.
and maintain a relationship with an outside supplier. -
parameter that inifluences transaction costs (Williamson ".
Long-term cooperative;relationships sometimes involve 1985).
Unpredictability or uncertainty in.the behavior of
a form of "credible comritment" on the part of a firm -
transacting parties; also raises transaction costs because
and a supplier.'For example, a supplier may.make a
:transacting:parties.need to safeguard the contract in uncer-
financial commitment to supply parts over an extended tain
situations. - .i . . . .
time period., . -- '' . :.'-- - Williamson (i985) stated that it may
not be necessary,
A firmil may secure inputs by turning to market -- to estimate
the transaction costs of vertical integiation
mechanisms, usually.in the form of a.spot-bid contract and
outsourcing. It is usuallyzsufficient to merely compare'
(Williamson 1975). A spbt-bid contract represents -a legal
'these costs at a given time (i.e., in a-"compaiative-static". .-
agreement between a buyer and a seller to engage in an
fashion). Managers choose between vertical integration

economic exchange within the parameters established and
outsourcing-deperidihg on which economizes on ' -
in- a written document over a specified time period. the
transaction costs. For example, firns with specialized
Typically,:a spot-bid contract is completed after one or
resourcesimay findit more efficient to integrate vertically,_
.more firms successfully bid for the right to engage in anv
whereas those,with unspecializedresources may opt f6r;-
economic exchange. - - . outsourcing. - . -' C. r -. *
Besides the strategies described above, -firmsmay use - , - .
barter, countertrade, sole sourcing, and; multiple souicing' .
; . ' .-. i ' -i. :.;:: ::; .. -0-: ,,, The Journal ofSupply Chain
ManagementI Winter.2001 19
7he Use of Intermediate Souirng Strategies
Research Questions
Traditionally, TCE offers an explanation for the choice of
vertical integration, as opposed to outsourcing. However,
the criteria for the selection of intermediate sourcing strate-
gies are not clear. Hill, Hwang, and Kim (1990) argued
that TCE views a transaction in isolation (e.g., to integrate
vertically or not). Therefore, it usually does not allow all
transactions to be compared simultaneously. Although
some researchers (e.g., Williamson 1991b) have attempted
to address these shortcomings, the existing research does
not offer concrete guidelines for the choice of intermediate
sourcing strategies. Following the spirit of exploratory
studies, several "research questions" are outlined in this
article instead of developing "hypotheses" (e.g., Schendel
and Hofer 1979; Garvin 1986). Next, the rationale under-

lying the research questions is outlined.
Anecdotal evidence suggests that a firn's choice of
sourcing strategy is not limited to vertical integration
and outsourcing, but also includes intermediate sourcing
strategies. As an example, taper integration is considered
to reduce the threat of opportunistic suppliers (e.g.,
Harrigan 1983). Alternatively, long-term cooperative
relationships can also help an organization to foster a
trusting relationship with suppliers and counter oppor-
tunism to some extent. Therefore, in principle, a fimn
that aims to reduce the threat of supplier opportunism
can choose among vertical integration, taper integration,
and long-term cooperative relationships.
A firm with unspecialized assets may find it more effi-
cient to outsource than to integrate vertically. However,
taper integration and long-term cooperative relation-
ships can also serve as substitutes for outsourcing. It is
not clear a priori why firms choose the intermediate
sourcing strategies, as opposed to the polar strategies,
based on the TCE rationale alone.
Question 1: Are firms equally likely to select
intermediate sourcing strategies
and polar sourcing strategies?
Among the intermediate sourcing strategies, the criteria
for the selection of taper integration and long-term coop-
erative relationships are not clear. Ring and Van de Ven
(1992) stated that a number of firms are adopting coopera-
tive supplier relationships m favor of adversarial strategies.
In particular, cooperative supply arrangements, such as
Just-In-Time, are reportedly becoming more widespread
among industrial firms. The trust (or the relative lack of
opportunism) between a firm and its supplier, fostered in

a cooperative supply arrangement, reduces the transaction
costs and results in a competitive advantage-in the long run.
Presumably, a firm can select taper integration instead
of a long-term cooperative relationship. Taper integra-
tion also requires a greater degree of trust between a
firm and its supplier than an adversarial strategy such as
competitive spot bidding. Therefore, both taper integra-
tion and long-term cooperative relationships provide an
altemative to competitive spot bidding.
Question 2: Are firms equally likely to use taper
integration and long-term supplier
relationships, when choosing an
intermediate sourcing strategy?
The industry in which a firm operates may be one of
the factors that influence a firm's choice of sourcing
strategy. For example, an industry that is characterized by
general-purpose, nonspecialized assets is likely to be asso-
ciated with low levels of transaction costs (Williamson
1985). This is because a firm can easily obtain inputs
through alternative means, should a supplier act oppor-
tunistically. Sometimes, firms develop industry-specific
assets through production networks. Production networks
among firms often build trust among the players and
lower the transaction costs of outsourcing (Carney 1998).
Question 3: Does the type of industry signifi-
cantly influence a firm's sourcing
strategy?
METHOD
Survey Design and Sample
A questionnaire was developed as part of a larger study

of sourcing strategies. It was mailed to plant managers in
1,000 Southeastern manufacturing facilities. Nine hun-
dred eighty-three plant manager names and addresses
were used from a list provided by American Business
Lists (ABL). An additional 17 had to be drawn at random
from the 1995 Industrial Directory because some plants
on the ABL list had a policy of not responding to sur-
veys. Only two surveys from the original mailing were
not deliverable. These two companies were eliminated
and replaced with two other companies from the 1995
Industrial Directory to ensure 1,000 companies on the
mailing list.
A modified version of Dillman's Total Design Method
(Dillman 1978) was used to develop the instrument,
pretest the instrument with plant managers and strategic
management scholars, mail the instrument, and follow
up on non-respondents. Ten business school faculty
members and doctoral students were asked to assess the
face and content validity of the survey items (Stone
1978). The resulting instrument was then pretested by
10 plant managers in a cross-section of industries. These
interviews yielded useful suggestions to strengthen the
face and content validity of the instrument. In each
interview, the plant manager was given a cover letter
and survey. The managers were asked to read the cover
letter and complete the survey in the presence of the
researchers. The managers' actions were observed to
detect any delays or indications of concern or confusion
on their part. In the event they seemed concemed or
confused, clarifications were offered. Feedback was
obtained from nine plant managers in nine different
industries. A tenth manager declined to participate due
to competitive pressures.

The Use of Intermediate Souraing Strategies
Tollowing Dillman (1978), several techniques were used on a
nominal scale.'Table I also shows the cumulative
to increase the response rate. .Three follow-ups were mailed
relative frequency distribution for the employee and
after the initial mailing of the instrument: I . 'sales
categones.The employee size of the plants ranged
* A postcard was sent one week after mailing the from 20 to
.4,999. Sixty-one percent of the' plants 'had
survey to thank those who had returned the employees'fewer
than 250. Sales ranged from.$2.5 mil-
survey and to remind those who had not.- lion to $1 billion.
Sixty-seven percent of the plants had
* A letter, and questionnaire was'sent three weeks sales less
than $50 million. The plants were located in
after the initial mailing to non-respondents. seven'Southeastem
states.
* A letter and questionnaire was mailed seven weeks Out of the
209 respondents, .164 were plant managers.
after the original mailing to -non-respondents.' - Thirty-nine
indicated that they worked in a closely related
Two hundred nine plant managers refurned a com- ' functional
area such as purchasing, materials management,
plete survey. This resulted in an initial response rate of 'or
operations management. Only six indicated that they
21 percent. This rate is comparable to other studies of were not
plant managers or a closely related functional

sourcing strategy (e.g., Narasimhan and Carter 1998). exPert.
To ensure that there was -no bias in the sample, a com- Table II
shows the distribution of firms based upon
parison of respondents to non-respondents was made two-digit
SIC. To' determine if the returmed surveys rep-
using the chi-square test. The comparison was made across
resented a random subset of the initial mailing; the
.(1) industry type, (2) number of employees, (3) sales, and
respondents were classified by two-digit SIC.' This classi-
X(4) geographical location. The chi-square'tests did not '
fication permitted a comparison to the 1,000 plants in
reveal any-significant differences between respondents the
original mailing. A chi-square test revealed no sig-
and non-respondents.along these categories. Similarly, nificant
response bias by SIC with respect to the distrib-
chi-square tests revealed no significant differences between
ution of surveys returned.
early and late respondents in the.above categories. . . -
Seventy surveys were mailed to respondents a second
time to analyze test-retest reliability (Stone:1978). The
retesting was done three to four weeks after.the first
questionnaires were received from respondents. This
choice reduced the chance of overestimating the relia--
bility. Thirty-eight usable surveys were retumed. The
percentage of surveys that showed no difference between'
the first and the second response was 71 percent for
Question 1 and 79 percent for Question 2.
Measures '-
The sourcing strategy was measured by asking two
questions (see Appendix A). The first two choices to
Question 1 measure vertical integration. The third and
fourth choices measure taper integration, -whereas the
fifth choice measures competitive bidding. The second

.question asks about long-term supplier relationships and
provides an additional measure of competitive bidding.
Industry type was coded using a two-digit Standard
Industrial Classification (SIC). The SIC for each company
was provided with the mailing list from.ABL.
* - The specific terminology for the survey questions was
carefully pretested with management.faculty, doctoral
students, and 10 plant managers who completed the
survey in the presence of the researchers. This-was done
to make sure that'the four strategies were clearly distin-
guishable to each respondent and corresponded to the
four sourcing strategies developed for this research.
RESULTS
Table I shows the descripthie statistics. Because of the,
confidentiality of data at the plant level, ABL provides,
information about sales and the number of employees
Table III categorizes the responses according'to the
sourcing strategy categories. Table.1V summarizes'the
results of chi-square tests on these data.
*The data in Table IV(A).help to address Questi6n 1. The
chi-square test of a muitmomial experiment suggests a sig-
nificant difference between the predicted and actual-pro-
portions of sourcing strategies (p = 0.001). Left to chance,
one would expect the four strategies to occur in equal pro-
portions:- However, the cli-square test revealed that the
firms did not use the four sourcing,strategies in equal pro-'
portions. Furthermore, the intermediate sourcing strategies
constituted the majority of sourcing strategies.
Table IV(B) addresses Question 2. If the firms selected
intermediate strategies randomly,they would be equally

I - I: . I , . X .
' L;
.. j l , ,
, i - ., --n g -
I _ P2.*';Table I
DESCRIPTIVE STATISTICS
Number of Employees Sales ' Location
Cat Frq (Crf) ' Cat. Frq (Crf) :State Frq (Rf)
20-49 *2 (0.00) - 2.5-5 mil 2 (0.00) 1 ' 19 (0.09)
50-99 38 (0:19) 5-10 'mil - 26 (0.13) 2 77 (0.37)
100-249 89 (0.61) -10-20 mil -47 (0.35) 3 32 (0.15)
250-499 48 (0.84) 20-50 mil 65 (0.67) 4 22 (0.11)
500-999 22 (0.95) 50-1 00 mil 38 (0.85) 5.- 9 (0.04)
1,000-4,99.9 ,10.(1.00) 100-500 rnil .30 (0.99) 6.; 32 (0.15)'
'500 mil-1 bil 1 (1.00) 7 18 (0.09)
Note: Cat= categories,'Frq = frequency, Crf = cumulative
relative frequency,
Rf = relative frequency ' ' -
The Joumdl of Supply Chain Management Winter 2001 21
. i
, -( _; 7�. I I i
q

7he Use of Interrnediate Sourcing Strategies
Table II
COMPARISON OF THE RETURNED SURVEYS
TO THE MAILING LIST BY SIC
SIC
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

37
38
39
Respondents
n = 211
10
0
38
19
9
10
11
9
21
3
11
2
6
7
14

15
15
8
3
0
Mailing List
n= 1,000
70
3
177
141
49
56
54
26
64
7
71
6
30
37
62

57
52
26
9
32
XI = 25.07 not significant at p = 0.05.
Table III
SOURCING STRATEGIES
Strategy
Vertical Integration
Taper Integration
Long-Term Cooperative
Competitive Spot-Bid
Frequency Percent of Total
29
121
38
21

13.9
57.9
18.2
10.1
Rank
3
1
2
4
likely to choose taper integration or long-term supplier
relationships. However, the chi-square test indicated that
there was a significant difference between the actual and
predicted proportions of the two intermediate sourcing
strategies (p = 0.001).
The above results suggest that a firm's choice of a
sourcing strategy may depend on some strategic vari-
able(s), other than chance. As stated in Question 3, it is
suspected that the choice of sourcing strategy may depend
on the industry, among other variables. Table V(A) shows
the distribution of sourcing strategies according to the
two-digit SIC.
The chi-square test usually requires a large number of
responses in each individual cell. SICs 20 through 29 are
typically associated with commodity-like products (e.g.,
lumber, greige cloth, and other products). On the other

hand, SICs 30-40 are typically associated with products
that are differentiated by the manufacturer (Hayes and
Wheelwright 1984). Therefore, the responses for SICs
20-29 were aggregated into one category and the responses
for SICs 30-40 into another.
Following the guidelines for a chi-square test of a multi-
nomial experiment, the expected frequency distribution of
sourcing strategies was calculated using the data in Table
V(B). The chi-square test revealed significant differences in
the sourcing strategy distribution between the two types
of industries (p = 0.10). This suggests a possible influence
of the industry type on a finn's selection of sourcing
strategy. The likelihood-ratio chi-square statistic (G2),
another measure of association between the industry type
and the sourcing strategy (see Fienberg 1977 for further
details), was also calculated. This statistic (G2 = 7.2) was
also significant at p = 0.10.
The effects of plant sales and geographical location on
the sourcing strategy were also investigated. The Spearman
rank correlation of the sourcing strategy with plant sales
was -0.09 (insignificant at p = 0.10). The chi-square test
did not indicate any significant association (at p = 0.10)
between the sourcing strategy and plant sales or geograph-
ical location.
The relationship between sourcing strategy and number
of employees was tested next. There was a significant
Spearman rank correlation (-0.19, p < 0.05) between
number of employees and sourcing strategy. To further
investigate this relationship, the sourcing strategy variable
was regressed on the industry type along with number of
employees, sales, and location. The sourcing strategy vari-
able, although ordinally scaled, was treated as a categor-
ical variable to avoid the requirement that the categories

be "equally spaced" (Lunneborg 1994). Sometimes, the
proportional odds model, a variation of the multinomial
logit model, is recommended for the ordered categories
response variable (McCullagh and Nelder 1989). The pro-
portional odds model offers an intuitively better explana-
tion of the odds of success for different categories.
However, the purpose was not to estimate the odds of
success for one sourcing strategy category, as opposed to
another, but to investigate the effect of industry type on
sourcing strategy in the presence of control variables.
Therefore, the maximum likelihood multinomial logistic
regression was used. Table VI sunmnarizes the results of
this procedure.
Because the sourcing strategy has four categories, there
are three (4 -1 = 3) logits. Logits 1, 2, and 3 compare the
odds of selecting vertical integration, taper integration,
and longterm supplier relationships, respectively, with
the odds of selecting a cormPetitie bidding strategy. Table
VI(A) shows the global significance of the independent.
variables -in all logits simutltaneously. The overall model
was significant (p-< 0.05), as indicated by the global clii-
square statistiCX= 42.SS). Thevariables industry.type
and-number of employees were significant (p < 0.10-ahdb
p < 0.05, respectively) in atleast one of the logits.
The industry type (SIC) was significant (p <-0.10) in
the logit that compares the oddso6fselecting taperilnte-'
gratioh with those of selecting a competitive biddint g-
strategy.nThe number of employees was significant (p <
0.05)Jn the lo gi t that comp ares the odds of selecting

the vertical integration strategy (p < 0.05) and-the taper.
integration strategy (p <-0.05) with those of'selecting a,
compehitive bidding strategy.
DISCUSSION - -
The statistical evidence regarding the first research
questioni suggests that firnsA use intermediate sourcing.
strategies more frequentlythan the "polar"strategies,
(i.e., vertical integration and outsourcing). This finding:
-cannot be satisfactorily explained on the basis of the
TCE rationaie alone. If firns indeed econornized only.on
transaction costs, then one would expect firms to select
mostly-vertical integration and competitive spot bidding
strategies. This finding tentatively supports Hennart's
-(1993) assertion that firns are more likely to select
intermediate sourcing strategies than polar strategies.
Following Hennart's rationale, the results suggest that
firns choose sourcing strategies so as -to economize on
multiple types of costs, riot just transaction costs. -
Besides transaction costs,production costs also influence
the choice of a sourcing strategy (e.g.* Harrigan 1984).
Production costs are the costs associated with the.input,;
throughput, -and output stages of production. These -
include the prices 'of labor, material, energy, and land,
as well as the costs of input processing. Mohan and
Berkowitz (1988)noted that raw materials alone account
for 60 to 70-percent of the production costs for a steel
manufacturer. Because purchased inputs are such a large
portion of total product cost,.the makeor-buy decisions'
are often.based on production cost.considerations (Welch
and Nayak 1992). -
There is anecdotal evidence that intermediate strategies,

such as taper.integration and long-term contracting, -
often involve transaction cost and production cost con-
siderations. T6r example; a-firm's taper integration strategy
involves-moderately-high costs of production. However, it
helps to control opportunistic suppliers and economizes
on the attendant.transaction-costs (Harrigan 1983). Long-
term supplier relationships expose'a firm to the hazard of'
opportunistic suppliers, but.they may'help to economize
on production'costs (Sweetrian 1996).
Consider the following continuum of sourcing strate-
gies: vertical integration, taper integration; long-term
cooperative relationships, and competitive spot bidding.
Transaction costs increase monotonically from the vertical
The Use of Intermediate Sourcing Strategies
Table IV
CHI-SQUARE TESTS
(A) Chi-Square Testfor Sourcing Strategy Distribution
Predicted, Actual
Strategiy pi- ' P
Vertical .Integration
Taper Integration
Long-Term C6operative'- * -
Competitive Spot-Bid -
roportion '

0.25
0.25
.0.25
0.25 I
- Proportion
' 0,139
0.579 -
- _L _ - *,.....;
0.182
0.101
XI = 86.00 significant at p 0.001; n =-209.
(B) .Chi-Square Test for Intermediate Sourcing Strategy
Distribution
-Strategy
Taper Integration
I . _- Predited " .
- i l ' Proportion ;
0.50 --
-Long-Term Cooperative 0.50

%2 = 43.32 sianificant at p = 0.001; n = 159.
* Actual -
Proportion
0:761'
0.:239
I~~~~~~~~ I *- I * : . - -. 1 . i ,~
e: The.actual'proportions in Tables IV(A) and IV(B)
are.calculated using the
ueny distribution in'Table 111. -
integration strategy to competitive spot bidding. Production
costs are.considerably higher in the' vertical integration
strategy than in other sourcing strategies because it cre-
ates exit barriers that trap firms into using obsolescent
* technologies.(D'Aveni and Ravenscraft 1994). Further,
- production costs may be increased by underutilization
; of capacity in some stages of production (Harrigan 1983).
iTherefore,- production c6sts decrease.monotonically from
the vertical integration strategy to competitive spot'bidding.-
- The sum of transaction costs and production costs may
. .be a'U-shaped curve that "bottoms out" in the interme-
diate range of sourcing strategies. As a result, a firm that
-economizes-on both transaction costs and production
costs is mbre likely to choose:intermediate sourcing strate-
gies. The findings are consistent with-this explanation..
The second research question concens the choice among

intermediate sourcing strategies. The findings suggest that
firms choose a particular intermediate sourcing strategy
consciously instead of selecting one randomly. This also
implies that a finm's choice am6ng intermediate sourcing
- strategies -is not ranidom. - - -
The third research questioh addresses the influence
of industry type on.the selection of a sourcing strategy.
Specifically, two types,of industry were considered:
unspecialized (i.e., commfiodity-like rioducts) and spe-
cialized goods manufacturers. The findings indicate that
the sourcing strategy distribution was significantly dif-
ferent for the specialized and unspecialized industries.
The sourcing strategy. choice was significantly associated
; with,the industry typeleven after controlling the number
of-employees. - -
Theoumalof Supply Chain'Management Winter 2001 23
S - ;
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The Use of Intermediate Souring Strategies
Table V
DEPENDENCE OF SOURCING STRATEGY ON INDUSTRY
(A) Sourcing Strategy Distribution According to Industry Type
Sourcing Strategy
Standard
Industrial Long-Term Competitive
Classification Vertical Taper Cooperative Spot-Bid
(SIC) Integration Integration Relationship Contract
20 2 5 1 2
22 7 15 12 4
23 4 12 1 2
24 2 4 3 0
25 0 10 0 0
26 2 5 1 3
27 1 2 5 1
28 1 12 5 3
29 1 1 1 0

30 0 6 3 1
31 0 0 0 2
32 0 3 2 0
33 2 2 1 2
34 1 12 1 0
35 3 10 1 1
36 1 14 0 0
37 2 5 1 0
38 0 3 0 0
Total 29 121 38 21
(B) Chi-Square Test for Association of Sourcing Strategy with
Industry Type
Sourcing Strategy
Long-Term
Full Taper Supplier Competitive
SIC Integration Integration Relationship Bidding
20 66
9 55
29

9
15
6
XI 7.56 significant at p = 0.10.
Furthermore, industries with unspecialized products
showed a significantly higher incidence of competitive bid-
ding and long-term supplier relationships, as opposed to
taper and vertical integration. On the other hand, industries
with specialized products showed a significantly higher inci-
dence of vertical and taper integration, compared with
long-term supplier relationships and competitive bidding
A tentative explanation for the above finding is the
following. Industries that manufacture specialized prod-
ucts often experience high levels of transaction costs
(Williamson 1985). Therefore, these firms are more
likely to integrate fully or use taper integration to avoid
being subject to supplier opportunism. The manufac-
turers of unspecialized products are less likely to experi-
ence supplier opportunism. Therefore, production costs
are perhaps more likely to be a deciding factor in the
choice of a sourcing strategy in unspecialized industries.
The outsourcing and long-term supplier relationship
strategies may help the unspecialized manufacturers to
economize on production costs.
CONCLUSION
This study investigates the frequency of use of sourcing
strategies among a sample of 209 manufacturing firms in
the Southeastem United States. The study's purpose was

to evaluate the extent to which firms use intermediate
sourcing strategies, such as taper integration and long-
term supplier relationships, as opposed to the polar strate-
gies of vertical integration and competitive spot bidding.
The findings suggest that firms use intermediate sourcing
strategies more frequently than the polar strategies. They
also suggest that firms choose a particular intermediate
sourdng strategy consciously and not randomly. Further,
the distribution of sourcing strategy differs significantly
across industries. The specialized goods manufacturers
used vertical and taper integration more frequently than
long-term supplier relationships and competitive spot
bidding. On the other hand, the unspecialized manufac-
turers used long-term supplier relationships and competi-
tive spot bidding more frequently than taper and vertical
integration.
Much of the existing literature on sourcing strategies
focuses on the polar sourcing strategies. This can mislead
managers and researchers to conclude that firms usually
choose between vertical integration and competitive
spot bidding to the neglect of intermediate sourcing
strategies. The results of this study suggest the opposite.
The study also tentatively supports Hennart's (1993)
proposition that intermediate sourcing strategies may
constitute a "swollen middle." It appears that firms may
choose a sourcing strategy in order to economize on
both transaction costs and production costs.
Taper integration has received very little attention in the
literature. Hopefully, this study will lead to exploration of
the determiinants of taper integration and other interme-
diate sourcing strategies.
This study is an exploratory investigation into the use
of intermediate sourcing strategies by manufacturing

firms. Exploratory studies generally provide a starting
point where there is relative lack of theory. Therefore,
they are also subject to several limitations. The explana-
tions advanced while addressing the research questions
in this study should be viewed as tentative, given the
exploratory nature of the study. In the future, researchers
may build on the existing theoretical foundation and
generate testable hypotheses.
24 The Journal of Supply Chain Managetnent I Winter 2001
20-29
30-40
The Use of Intermediate Sourcing Strategies
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'able'VI -L I '
RESULTS OF MULTINOMIAL.LOGISTIC REGRESSION
I~~~~~~~~~~~~~~~~~~ t: , t .' .
(A) Maximum Likelihood Analysis of Variance Table
Dependent Variable:,Sourcing Strategy (STRAT) - - -
, I- , -. i Chi-Square- -
I .' . .__ _ _ ' A O I
-intercept
SIC
I.- EMPL
Likelihooc

4. 5.,
- I 6.20*
7.90**
J Ratio 42.55**
(B) Maximum Likelihood Parameter Estimates
Intercept
1. .
- SIC
. .EMP.
Logit Coefficient
1 -2.07
'2 -0.99
3 -0.19 4
1' *0.O1'
- 2-
1
2
*0.55
-0.49
0.71;

0.62-
3 _ , 0:31
Chi-Square
2.61*
0.88
* 0.03 z
0.01
2.50*
0.60
,.5.42**
5-37**
1.05
Note: STRAT:rsourcinq strategy scored from 1 to 4; 1 vertical
integration,
2 - taper integration, 3 long-term ielationship, 4 = competitive
spot bidding.
*-SIC: incdustry type; SIC= 1,for:SIC 20-29, and 0 otherwise.
EMPL: number-of employees scored from 1 to 6 (smallest to
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-Table I. -
p < 0.1 0;-** p < 0.05.
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~~_. 4 : : .-
The Joumal of Supply Chain Management l Winter 2001 25
I
u
I
t::- t
.� 74
.;
- , A.- ----- ---I
I �; I I
... m :� I I- I
; -111,
The Use of Intermediate Souring Strategies
Appendix I
SURVEY QUESTIONS

STRATEGIC SOURCING QUESTIONNAIRE
When thinking about.how to source inputs to your plant's
production process, please consider one end product
that is manufactured and sold by your company. Within the
context of this scenario, also consider key parts,
materials, components, and subassemblies (inputs) that are part
of the end product you have chosen to con-
sider. Consider both the end product and its key parts,
materials, components, or subassemblies throughout the
questionnaire.
Look at the following figure. Consider a single final product
(labeled Y below) your plant currently makes. Write
the name of that product in the space provided. Consider only
this end item throughout the remainder of the
survey.
Y:,
y End Product
X1 *X2 X3 X4 X5 Parts, materials, components,
and subassemblies
Please consider Y, the end item that is made by your plant and
sold to customers. In the following questions, we will
use Y to refer to that particular end item.
Q-1 Does your company make any of the different components
that are used to make Y? (Please circle one
answer.)
1 All of the different components are made at the same plant
that makes Y.

2 All of the different components are made by the company, but
at different plants.
3 Some of the components are made at the same plant that
makes Y, the rest are made by other
companies.
4 Some of the components are made by the company, but at
different plants, the rest are made by
other companies.
5 None of the components for Y are made by the company, all
are purchased outside.
6 Other (please explain):
Q-2 If some of the components for Y are purchased from
external suppliers, do you use (please circle one
answer):
1 Competitive bidding for key components.
2 Long-term relationships with suppliers for key components
(for example, strategic alliances, Just-In-Time
supply, strategic partnerships).
3 Some other sourcing arrangement (please explain).
26 The Joumal of Supply Chain Management I Winter 2001
COPYRIGHT INFORMATION
TITLE: The use of intermediate sourcing strategies

SOURCE: Journal of Supply Chain Management 37 no1 Wint
2001
WN: 0134906472004
The magazine publisher is the copyright holder of this article
and it
is reproduced with permission. Further reproduction of this
article in
violation of the copyright is prohibited. To contact the
publisher:
http://www.napm.org/.
Copyright 1982-2002 The H.W. Wilson Company. All rights
reserved.
Each article review must use the following outline (use a
heading for each bullet point):
· Cite the article (use same format as bibliography at the end of
the textbook chapters)
· Provide a brief summary/overview of the article (2-4
paragraphs)
<note: the two sections above are limited to one page>
· Was this paper peer reviewed or editorially reviewed? How
was this determined (include a website url if appropriate).
(Peer reviewed papers are received by editors and sent out to
usually two or more people who provide a critique of the article
which informs the editor’s decision as to whether it should be
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reviewed by the editor.) One way you can determine if an
article is peer reviewed or editorially reviewed is to look up the
publication’s website and look for a section on “information for
authors/contributors.” They will usually specify in that section
how manuscripts are reviewed for possible publication. You
should assume an article was editorially reviewed unless you

have specific evidence that it was peer reviewed.
· Main theme:
· What is the main takeaway from the article? What specifically
did you learn?
· Research method/support:
· How did the author(s) come to their conclusion(s)? (e.g.
personal experience/opinion, case/multi-case analysis, survey-
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· Discuss the particulars of the methodology. For example, if
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a few.
Finding articles should begin with an online search using
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immediately, it can be requested through inter-library loan. A
representative from the library will be making a presentation on

using the system at the beginning of the second night of class.
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maximum of three pages.

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