A behavioral study of supply manager decision-making: Factors influencing make versus buy evaluationIntroductionBehavioral decision-making by managers for make versus buyTask related characteristicsRisk and violations of the expected utility modelPersonal characteristicsConceptual frameworkFramework overview and integration of the two literaturesCore competencyStrategic vulnerabilityCore competency and strategic vulnerabilityInformation source formalityMethodsWhy an experiment?Experimental design and instrument administrationDecision scenariosPre-testIndependent variablesDependent variableSubjects and questionnaire administrationPooling testStatistical analysis and resultsDiscussion of resultsCompetence, risk and informationImplications for practiceLimitations and implications for future researchConclusionsAcknowledgementAppendix AScenario 1Scenario 2ReferencesA behavioral study of supply manager decision-making:Factors influencing make versus buy evaluationSusan Powell Mantela, Mohan V. Tatikondaa,*, Ying LiaobaIndiana University, Kelley School of Business, 801 W. Michigan St. Indianapolis, IN 46202, United StatesbUniversity of Toledo, College of Business Administration, 2801 W. Bancroft St. Toledo, OH 43606, United StatesReceived 1 May 2005; received in revised form 10 August 2005; accepted 2 September 2005Available online 27 December 2005AbstractThis paper investigates behavioral factors influencing a supply manager’s decision to insource or outsource the manufacture of aproduct component. To do so we posit a theoretical framework that integrates the heretofore distinct operational make–buyliterature and the behavioral decision-making literature. Within the framework three factors influencing the make–buy decision arebrought into account: the decision-maker’s perception of supply risk or ‘‘strategic vulnerability’’, the degree of core competencyrepresented by the product component under consideration and the formality of the information about supply alternatives. Theresults of a controlled experimental survey show that: strategic vulnerability and core competency do influence the make–buydecision, strategic vulnerability has greater influence than core competency and information formality moderates the make–buydecision when the strategic vulnerability and core competency conditions are mixed. The practical implications of these resultsinclude the notion that management can ensure a more rational make–buy decision if they understand the biases that influence thedecision and point these biases out to the decision maker.# 2005 Elsevier B.V. All rights reserved.Keywords: Outsourcing; Supply chain; Behavioral decision making; Experiment; Purchasing; Supply risk1. IntroductionOutsourcing in general, and the make–buy decisionin particular, are important and recurring operationalissues in contemporary supply chain management.Firms can use outsourcing to leverage the organization’sinternal and external resources, capabilities andcompetencies. In particular, the decision to insourceor outsource an existing part or sub-assembly couldallow a firm to free up needed resources to focus onmore important, newer or higher return processes andopportunities. As such, mak e–buy decision-makingtakes on a critical importance (Stock and Tatikonda,2000; McIvor, 2005; Leenders et al., 2006).The study of the make–buy decision has typicallyassumed that the ‘‘firm’’ makes the decision using aneconomic utility model to best serve the long-term goalsof the company. However, the employees that make thedecisions (e.g., supply chain managers, purchasingagents or materials managers) are human, and humandecision-making is ‘‘bounded’’ in its ability to acquireand process information. Humans tend to use simplify-ing heuristics to deal with complex problems (Simon,1997). These heuristics are generally effective indecision-making. They help to filter and assimilatethe data. Heuri stics are especially likely to drive thedecision outcome when the decision process enters a‘‘gray’’ area where there is no clearly dominant bestalternative.www.elsevier.com/locate/jomJournal of Operations Management 24 (2006) 822–838* Corresponding author.E-mail addresses: [email protected] (S.P. Mantel),[email protected] (M.V. Tatikonda), [email protected](Y. Liao).0272-6963/$ – see front matter # 2005 Elsevier B.V. All rights reserved.doi:10.1016/j.jom.2005.09.007To address the issue of human involvement in themake–buy decision, we integrate two sets of literature :the operational make–buy literature and the behavioraldecision-making literature. The operational make–buyliterature prescribes whether insourcing or outsourcingis appropriate in a particular situation. This literaturehas evolved over several decades. The first work in thisstream treats the make–buy decision as an economicone focusing on minimization of the one-time and totalcosts incurred in buying or producing the product. Thisapproach is grounded in ‘‘transaction cost economics’’(Williamson, 1981) and is well known for its bifurcationof decision alternatives into ‘‘markets’’ or ‘‘hierar-chies’’. Markets (i.e., purchase from an externalsupplier, also known as ‘‘buy’’ or ‘‘outsourcing’’) areemployed in low transaction cost situations, whilehierarchies (i.e., internal vertical integration, alsoknown as ‘‘make’’ or ‘‘insourcing’’) are employed inhigh transaction cost situations.The literature then evolved to include considerationof the essential nature of the item under make–buyevaluation. Here, whether the item is central to thecapabilities of the firm drives the make–buy decisionfrom a more strat egic perspective (Prahalad and Hamel,1990). This approach is grounded in the ‘‘resource-based view’’ of the firm. Companies could moreeffectively allocate scarce resources by outsourcingnon-core activities, and by focusing their operationalefforts and capacity on core competencies: skills,knowledge and technologies that a company must ownin order to differentiate itself and compete effectively(Barney, 1991; Peteraf, 1993; Nellore and Soderquist,2000). This is fundamentally a management decisionrelating to protection and development of intellectualproperty, capital and ‘‘know how’’ (Bohn, 1994).A more recent branch of the operational make–buyliterature incorporates the realities of contemporarysupply chains by considering myriad