Roles of In-house Production in Firms' Supplier Management

Input procurement plays important roles in firms' production. In this paper, I shed light on the roles of firms' in-house production in managing relationships with their suppliers. In the existing literature on firms' procurement choices, in-house production is treated as an alternative to outsourcing from suppliers, as "outsource" versus "in-house" decisions are considered mutually exclusive. However, in reality, when firms outsource an input from suppliers, some firms also seem to produce the same/similar input in-house (IRC, 2016).

Keeping the production of an input in-house, firms would be able to accumulate know-how or soft information on the production, while outsourcing from suppliers would provide the benefit from scale economies at suppliers selling their products to multiple firms and from market competition among suppliers. In this paper, using the 2016 data book of automobile parts procurement published by the Industry Research Center Co., Ltd. (2016 IRC data book), I examine how auto parts supplier characteristics differ between the case in which Japanese carmakers partly produce the input themselves and the case in which they exclusively rely on suppliers. In particular, combining the IRC data with much broader data on buyer-supplier relationships compiled by Tokyo Shoko Research Ltd., I focus on the role of distance and incorporate supplier characteristics regarding firms' supplier networks.