The Impact of Shared Sourcing on Knowledge Transfers and Quality Improvement

We investigate the problem of a buyer's investment in quality-related knowledge to improve the quality of product sourced from a shared supplier who also supplies the same product to other buyers. Knowledge gained via the buyer's investment in the shared supplier can spill over to other buyers who are potentially competing on quality for higher market share. Motivated by an empirical case study detailing the supplier investment practices of an automotive firm, we build and analyze a model informed by observations and theory to explore how (i.e., under what market and economic conditions) firms can gain from investing in quality-related knowledge at shared suppliers. Our analysis suggests that competition and spillovers moderate the buyers' incentives to invest in a shared supplier, and affect investments in quality improvement made by the shared supplier. We further examine the impact of relationship specific characteristics on knowledge investments and quality outcomes, and find that asymmetric profit margins for the shared supplier are a significant driver of asymmetric investment efforts and quality outcomes for the buyers. Our results enrich the observations in the existing literature, highlight the complexity underlying buyer-supplier relationships, and suggest the need for careful attention to a firm's policies for investing in shared suppliers.