New study shows the pitfalls of component outsourcing

  • 20-Aug-2010 03:40 EDT

In tough economic times, companies often slash staff and turn to outsourcing. And in good times, relinquishing control over critical components can contribute to quality issues and worse, according to a study led by Lyda Bigelow, strategy professor in the University of Utah's David Eccles School of Business. Her team found that companies were more likely to fail when they outsourced components critical to their competitive position. One of their previous studies shows that failure rate increased by 5-70%, depending on the risk associated with making technological changes, product type, and company market share. In the latest study on vertical integration, Bigelow and co-author Nicholas Argyres of Washington University analyzed performance in more than 100 U.S. auto companies from 1917 through 1931, to examine the industry's shift from innovation to production efficiency. Two modern examples with recent product issues that can be traced to outsourcing are Toyota and Boeing, according to Bigelow. "Companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail," she said.

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