Relational contracts and collaboration in the supply chain: impact of expected future business volume on the make-or-buy decision

Brahm, F and Tarzijan, J (2016) Relational contracts and collaboration in the supply chain: impact of expected future business volume on the make-or-buy decision. Journal of Supply Chain Management, 52 (3). pp. 48-67. ISSN 1523-2409

Abstract

Relational contracts are key to supply chain collaboration. The literature has focused on the role of trust stemming from prior business with current suppliers. However, the role of expected future business volume on the make‐or‐buy decision has been relatively neglected. This paper contributes to the literature by examining how the level of expected future business volume affects the make‐or‐buy decision, that is, the choice to produce the product or service internally rather than to outsource it. Using regression analysis of secondary data from 12,272 construction projects and controlling for endogeneity, our results show that expected future business volume promotes outsourcing and that this impact is larger when the level of prior business with external suppliers is stronger and there is more specificity in the relationship. Our results are consistent with a game theoretic logic in which informally promising future interactions to sustain collaboration is more credible to external suppliers than to internal units because the former can use their assets elsewhere. Also, our results suggest that trust stemming from prior business reinforces the calculativeness logic that stems from the expectation of future business.