Master thesis
Firm’s outsourcing activity types
and recalling events
Student name: Siyu. Gao
Student number: S3706397
Supervisor: Dr. X (Bruce) Tong
Second assessor:
Dr. Bortolotti
Abstract
Outsourcing has been proven to increase the risk of final product quality failures. Yet, when investigating the relationship between outsourcing activities and product quality failures, current literature either treat outsourcing as a whole or focus on certain specific outsourcing activity type, without comparing whether different outsourcing activity types have different levels of influence on product quality risks. This paper starts from a new perspective by studying the impact of multiple different types of outsourcing activities on quality problem-related product recalling events. The moderating role of the number of suppliers is also examined. The positive relationship between the number of outsourcing activity types and the possibility of product recalling events is found. For the moderating role of the number of suppliers, it is surprising to found that the number of suppliers will weaken the relationship between the number of
outsourcing activity types and the possibility of product recalling events.
Key words: Outsourcing activity types, Recalling events, Final product quality failures,
Table of content
1. Introduction 3
2. Theoretical background 4
2.1 outsourcing activity types and suppliers in the pharmaceutical industry 4
2.2 quality-related risks of outsourcing 6
2.3 supply chain quality management 7
3. Hypotheses development 8
3.1 The relationship between the number of a firm’s outsourcing activity types and product
recalling events. 8
3.2 The moderating role of the number of suppliers 10
4. Methodology 12
4.1 Research setting 12
4.2 Data and data source 13
4.3 research method 16
5. Results 17
5.1 Descriptive and correlation analysis 17
5.2 Regression analysis: the number of outsourcing activity types and product recalling events 18 5.3 Regression analysis: the moderating effect of supplier numbers. 20
6. Discussion and conclusion 22
6.1 The relationship between the number of a firm’s outsourcing activity types and product
recalling events. 22
6.2 The moderating role of the number of suppliers 22
6.3 Managerial Implications 23
6.4 Limitations 24
6.5 Conclusions and suggestions for future research 24
Reference list 25
1. Introduction
An article regarding the automotive industry mentioned that: “The whole industry is
disintegrating (or becoming less vertical) as vehicle assemblers try to outsource more and more of what they once did for themselves” (The Economist, 2019). Not limited to this industry, buying firms in many other industries also started to outsource more and more types of business functions (Ghodeswar and Vaidyanathan, 2008). Common outsourcing activity types involve information technology (IT), logistics, human resources (HR) management, research and development (R&D), manufacturing, marketing, and customer service (Ghodeswar and
Vaidyanathan, 2008). By increasing outsourcing activity types, companies are able to focus more on their core competency (Sink and Langley, 1997) as well as achieve the goal of cost saving (Kremic, Icmeli Tukel and Rom, 2006).
However, it should be noted that this strategy brings some negative influences. From the perspective of the buying firm, the main consequences of outsourcing activities include risks of leaking confidential information, final product quality failures and hidden costs(Tayauova, 2012).In this study, we concentrate on final product quality risks. Many studies investigate the relationship between outsourcing activities and product quality risks. Marucheck et al. (2011) indicated that outsourcing activities increase the length and complexity of the supply chain, which may threaten final product quality. Further, outsourcing involves the risk of losing control over outsourced activities, which may increase the possibility of suppliers' opportunistic
behaviors (Landis et al., 2005). Agency theory investigates the relationship between a principle and its agent. It points out that under the condition that the principal and its agent have conflict goals, the agent is more likely to develop opportunistic behaviors if the agent owns more information compared with the principle (Whipple and Roh, 2010). Opportunism will cause a series of contracting problems which includes product quality problems (Whipple and Roh, 2010). This theory helps to explain the negative relationship between outsourcing activities and product quality as the outsourcing relationship can be considered as a form of principal-agent relationship (Whipple and Roh, 2010).
recalls. However, when studying the relationship between outsourcing activity and recalling events, most of the existing literature either treats outsourcing as a whole or focus on certain specific outsourcing activity type, without comparing whether different outsourcing activity types have different levels of influence on product recall events. In addition, when the focal company decides to increase or decrease its outsourcing activity types, whether the possibility of recalling events will also change. In order to bridge this gap, this study aims to investigate the relationship between the number of outsourcing activities types and recalling events.
Therefore, the research question is as follows:
“How does the number of a firm’s outsourcing activity types affect the recalling events ?” Considering product quality is extremely important for the pharmaceutical industry, this industry is chosen as a research background. The impact of poor quality drugs is enormous, as they cause a significantly negative consequence on consumer safety and treatment outcomes, even are likely to result in patient death(Mackey and Nayyar, 2017). Another important reason is that in the pharmaceutical industry, the scope of a product recall’s influence can be very huge. A drug recall of a certain brand impacts not only the firm which undertakes the recall, but also affects
physician and customer perception of the drug category as a whole(Bala, Bhardwaj and Chintagunta, 2017). The last reason is that the pharmaceutical industry outsources at nearly every stage of the supply chain value stream, from the R&D phase to sales phase, which means buying firms in this industry may outsource more type of business activities (Rogers, 2008). During the data collection process, it is found that the main outsourcing activity types in the pharmaceutical industry can be divided into 5 categories, which are R&D outsourcing, manufacturing outsourcing, marketing outsourcing, distribution outsourcing, and technology outsourcing.
2. Theoretical background
2.1 outsourcing activity types and suppliers in the pharmaceutical industry
Compared with buying firms in other industries, buying firms in the pharmaceutical industry are likely to outsource more types of business functions to external suppliers (Rogers, 2008).
Normally, buying firms in most industries tend to outsource their non-core business functions to external suppliers, such as logistics and IT. Compared with them, firms in the pharmaceutical industry also outsource important business functions such as R&D, manufacturing and sales, which buying firms in other industries are more likely to keep in-house (Rogers, 2008). In the pharmaceutical industry, three common types of outsourcing activities are R&D outsourcing, manufacturing outsourcing and sales outsourcing. Studies related to these three types of outsourcing activities are summarized in table 1.
Table1 Different type of outsourcing activities
outsourcing category outsourcing activities Author(s)(year) R&D
drug development Lowman et al., 2012 R&D activities Higgins and Rodriguez, 2006
clinical trials Petryna, 2007
manufacturing Custom Primary Production Piachaud, 2002 Formulation Development Zhang et al., 2013
packaging service Zhang et al., 2013 Clinical Lots Manufacturing Zhang et al., 2013
sales distribution Steinle, Schiele and Ernst,
Organization) is mainly responsible for outsourced R&D activities (Piachaud, 2002). According to Piachaud(2002), the services provided by CRO organizations range from:
manufacturing and quality control to preclinical pharmacokinetic, pharmacology and toxicity studies; from the design, conduct and analysis of sophisticated Phase I and Phase II pharmacokinetic/pharmacodynamic (PK/PD) decision making studies to manage multicenter studies; or from quality assurance to database management, statistical analysis and reporting. (p.83).
CMO (Contract Manufacturing Organization) is responsible for outsourced manufacturing activities, such as custom primary production, clinical lots manufacturing and packing service (Zhang et al., 2013). CSO (Contract Sales Organization) provides a series of services and products related to pharmaceutical marketing and sales activities (Rogers, 2008). For buying firms in the pharmaceutical industry, they need to have corresponding expertise to adequately control and manage different types of external suppliers(Stump and Heide, 1996).
2.2 quality-related risks of outsourcing
Considerable research (e.g., Marucheck et al., 2011, Bozarth et al., 2009, Handley and Angst, 2015) has proved that outsourcing increases the risk of final product quality failures. It will be discussed from four aspects, which are supply chain complexity, information asymmetry and misaligned interests, supplier opportunistic behavior and outsourcing activity control.
Firstly, outsourcing activities will increase the complexity and length of the supply
chain(Marucheck et al., 2011). During the process that products move across supply chain nodes and geographical boundaries, the supply chain will become more complex and longer when external suppliers participate in this process (Marucheck et al., 2011). Supply chain complexity has been proved that have a negative impact on manufacturing plant performance (Bozarth et al., 2009) as well as increase the possibility of the supply chain disruption(Milgate, 2001), which both pose a risk to final product quality failures.
buyer’s ability to monitor the supplier's behavior effectively (Adams, 1994). Misaligned interest is explained as the buyer and the supplier may have conflict interests (Adams, 1994). Whipple and Roh(2010) pointed out that both the focal firm and external suppliers generally consider more on their own benefits or advantages, which shows the potential for misaligned interest between them. Agency theory studies the situation with information asymmetry and misaligned interests between a principal and an agent (Eisenhardt, 1989). In this situation, the theory indicates that when information asymmetry and misaligned interests both exist, the agent may consider its own interests firstly, which will damage the principal's interests (Laffont and
Martimort, 2002). Within this research, the focal firm is the principal and the external supplier is the agent. If information asymmetry and misaligned interest both exists in an outsourcing relationship, external suppliers are more likely to pursue its own benefits( e. g. provide poor quality products to reduce the production cost), which will damage to the focal firm’s interest(e. g. Increase the risk of final product quality failures).
Thirdly, Studies show that supplier opportunism is a principal challenge in the outsourcing relationship (Handley and Angst, 2015; Wathne and Heide, 2000). There are two forms of opportunism in the outsourcing relationship, which are shrinking and poaching (Handley and Angst, 2015). Shirking is the extent to which the external supplier deliberately underperforms or uses lower quality raw materials when it is difficult for the focal firm to detect their actions (Handley and Benton, 2012). Poaching represents the degree to which the external supplier tends to utilize information advantage through the outsourcing relationship for its own benefits (Handley and Benton, 2012). When suppliers develop these opportunistic behaviors, such as decreasing quality effort or using low-quality raw materials, it will damage the final product quality.
In addition, when a focal company outsources its business function to external suppliers, the focal firm will lose a certain degree of control over the outsourced activities (Landis et al., 2005). Barthélemy(2003) found that there are two main reasons why a focal firm will lose control over its outsourced activities. Firstly, the focal company may not have enough supplier management capabilities. Secondly, the focal company may not actively manage external suppliers as
successful supplier management requires high investments.
2.3 supply chain quality management
Traditional QM(Quality Management) mainly focuses on the quality programs within an individual company or department. However, in the outsourcing environment, when a firm purchases service or products from external suppliers, unpredictable events may occur in the whole process (Zu and Kaynak, 2012). The possibility of unexpected events increases the uncertainty of the whole production process, which may decrease the buying firm’s ability to guarantee final product quality (Zu and Kaynak, 2012). Hence, it shows the need for scholars to investigate quality issues at a supply chain level.
According to Robinson and Malhotra(2005), Supply chain quality management is defined as: The formal coordination and integration of business processes involving all partner organizations
in the supply channel to measure, analyze and continually improve products, services, and processes in order to create value and achieve satisfaction of intermediate and final customers in the marketplace.(p319).
Existing literature regarding SCQM emphasizes the importance of external suppliers in terms of quality management. Tapiero and Kogan(2007) found that external suppliers’ poor performance, such as use low-quality materials, violate regulations or quality standards, and fail to protect products against damage during the transportation process, is one main factor that results in final product quality failures. Trent and Monczka(1999) investigated the importance of external suppliers, especially in terms of maintaining the quality of product and service. Studies also show that if external suppliers can be involved in the new product design, then the final product could achieve a higher quality of final products(Fynes et al., 2005). Kaynak and Hartley(2008) suggest that the focal company should make sure that every member in the supply chain makes efforts to quality management in order to guarantee the quality of final products. Finally, Park et al. (2001) examined whether the quality management practices among external suppliers will be different if these suppliers have different performances in terms of overall performance, which includes financial performance, cost reduction and delivery. The overall performance is
measured by a common buying firm. They found that external suppliers, which have higher overall performance, also have a better performance in terms of quality management.
quality management also increases. If the answer to the last question is yes, whether the quality-related risks will also be higher for the buying firm as external suppliers become more important in terms of quality management.
3. Hypotheses development
3.1 The relationship between the number of a firm’s outsourcing activity types and product recalling events.
In this section, outsourcing activity control, agency theory and expertise requirement for buying firms will be used to elaborate on the hypothesized relationship between the number of a firm’s outsourcing activity types and product recall events.
A supply chain is an integration of different types of business functions, from the purchase of raw materials to the delivery of the final products (Beamon and Ware, 1998). Quality problems of any type of business functions would increase the risk of the final product quality
failures(Steven, Dong, and Corsi, 2014). Hence, in order to avoid final product quality failures, the focal firm needs to ensure the quality of every business function across the supply chain. When a firm decides to outsource its business functions(e. g. manufacturing, logistics or IT) to external suppliers, the firm will lose a certain degree of control over its outsourced activities as external suppliers participate in handling the process (Landis et al., 2005). Hence It will be more difficult for the focal firm to guarantee the quality of the outsourced business activities (Landis et al., 2005). When a firm outsources more types of business functions, the firm will lose control over more types of outsourced activities, hence there will be a higher possibility of final product quality failures. Product recalling events are highly related to final product quality failures (Steven, Dong and Corsi, 2014). As outsourcing more types of business functions increases the possibility of final product quality risks, there will be a higher possibility of product recalling events.
In the outsourcing relationship, both the focal firm and the external suppliers generally focus more on their own benefits. Typically, the focal company wants to purchase a relatively
(Mascarenhas et al., 2008), which may result in information asymmetry between these two parties. In line with the agency theoretical lens, it can be seen that when both conflicting interests and information asymmetry exist in the outsourcing relationship, external suppliers are more likely to develop opportunistic behaviors(Whipple and Roh, 2010). According to agency theory, conflicting interests provides the motivation for external suppliers to develop opportunistic behaviors as external suppliers are supposed to be selfish(Stump and Heide, 1996). Information asymmetry provides the ability for external suppliers to develop opportunistic behaviors (Stump and Heide, 1996). Due to lack of information, it is difficult for the focal firm to observe the external supplier’s behaviors, hence external suppliers are able to develop opportunistic
behaviors without being detected by the focal firm. Suppliers develop opportunistic behaviors (e. g. Deliberately underperforms or use lower quality resources) is an important reason that leads to final product quality failures(Whipple and Roh, 2010). Literature shows that monitoring suppliers helps to decrease the possibility of external suppliers’ opportunistic behaviors as the buyer can get more information from its suppliers (Stump and Heide, 1996). However, the focal firm needs to invest additional costs to monitor suppliers (Steinle, Schiele and Ernst, 2014). When a buying firm chooses to outsource more types of business functions, the company needs to build more buyer-supplier relationships with external suppliers. Hence the firm is more likely to suffer from misalignment and information asymmetry at the same time, as these two
phenomena are possible to appear in each buyer-supplier relationship (Aydin et al., 2010). Under this situation, it is more necessary for the focal firm to monitor its supplier behaviors. However, as the number of outsourcing activity type increases, the cost of monitoring suppliers will also increase due to a large number of suppliers. Hence it will be more difficult for the focal firm to avoid supplier’s opportunistic behaviors as the focal firm may not have enough funding to control and monitor all suppliers.
In addition, the focal firm needs to have a level of expertise to assess the outsourcing outcomes (Cui, Loch,Grossmann, & He, 2009) and achieve effective control over the outsourcing activities (Lacity, Willcocks, & Feeny, 1996). For example, when a firm outsources its IT business
function to external suppliers, the buying firm also needs relevant IT expertise to monitor and assess the supplier's performance (Han, Lee, and Seo, 2008). When a focal firm lacks expertise over its outsourced business functions, it will be more difficult for the focal firm to adequately control and manage external suppliers, as the focal firm will have difficulty in assessing the quality and the costs of the service provided(Stump and Heide, 1996). However, when a business function is outsourced, the focal firm is very likely to forget its internal knowledge after
lack requisite expertise over more types of business functions as outsourcing each type of business function may make the company lose relevant expertise on it. Hence, it will be more difficult for the focal firm to control all its external suppliers and outsourced activities. As the baseline, I propose:
Hypothesis 1: The likelihood of product recalling events is positively associated with the number of a company’s outsourcing activity types.
3.2 The moderating role of the number of suppliers
When a firm decides to outsource its business functions to external suppliers, an important factor that needs to be taken into consideration is the number of suppliers. From a focal firm’s
perspective, the number of suppliers will influence the degree of losing control over its outsourced activities and the ability to build close partnerships with its external suppliers. As hypothesized in section 3.1, when a firm outsources more types of business functions, the firm will lose a certain degree of control over more types of outsourced activities, hence there will be a higher possibility of recalling events which results from final product quality failures. In this case, a large number of suppliers will make the focal firm lose a higher degree of control over its outsourced activities. First of all, in order to achieve effective control over outsourced activities, the focal firm needs to have a high degree of communication with its external suppliers to share and exchange information timely(Kang et al., 2012). A large number of suppliers is related to largely increased and more complexed information flows, which increases the
possibility of misinformation transfer (Steven, Dong and Corsi, 2014). Under this circumstance, it becomes more difficult for the focal firm to communicate effectively and share accurate information with all external suppliers. In addition, when the number of suppliers increases, it will be more difficult for the focal firm to work closely with all external suppliers, which results in a lower level of cooperation between the focal firm and all suppliers (Larson and Kulchitsky, 1998). Studies show that the level of cooperation between the two parties is positively related to the control of the focal company over its outsourced activities (Li et al., 2009). Hence a lower level of cooperation between a focal firm and its external suppliers will make the focal firm lose more control over its outsourced activities.
to sacrifice short-term profits in favor of long-term shared benefits for both parties (Cannon et al., 2010). In other words, external suppliers are less likely to develop opportunistic
behaviors(Cannon et al., 2010). However, a focal firm can only build close partnerships with a limited number of suppliers as relationship development and maintenance with external suppliers need high investments and long time(Handfield and Bechtel, 2002). When a firm outsources more types of business functions, a large number of suppliers will decrease the focal firm's ability to build close partnerships with all external suppliers, hence its external suppliers are more likely to develop opportunistic behaviors.
Therefore, it can be anticipated that if the number of suppliers becomes higher, the hypothesized positive relationship between the number of a company’s outsourcing activity types and the likelihood of product recalling events will become stronger. Overall, by having a large number of suppliers, the negative effects of outsourcing more types of activities can be intensified, hence increasing the possibility of recalling events. As the baseline, I suppose:
Hypothesis 2: the positive relationship between the number of a firm’s outsourcing activity types and product recalls will be stronger if the number of suppliers is high.
Overall, the conceptual model that includes these two hypotheses is depicted in Figure 1.
4. Methodology
To test the two hypotheses, the methodology of this research is demonstrated in this section. It contains three parts, which are research background, data and data source as well as research method.
4.1 Research setting
The background for this research is recalling events happened in the pharmaceutical industry in the U.S., the role of FDA and the process of drug recalls will be elaborated in the following. This industry is regulated by the Food and Drug Administration (FDA). The role of FDA is to ensure the safety and effectiveness of prescription and over-the-counter drugs(Fda.gov, 2019). In order to perform its role well, FDA takes relevant measures like approving new drugs,
deficiencies, functional defects, and labeling errors are all related to product-quality problems. These defects will pose a potential health risk to the users of the drugs. Normally, a recall is a voluntary action taken by the pharmaceutical company. However, if the drugs show an obvious health risk, the FDA may force the pharmaceutical company to recall this drug. During the recall process, the FDA needs to classify the recall according to the degree of health risk given by the recalled drug. There are three class levels in total, Class I, Class II and Class III.Class I recalls focus on “ a dangerous or defective product that could cause serious health problems or death” (FDA.gov, 2019),Class II focuses on “a product that might cause a temporary health problem, or pose slight threat of a serious nature”(FDA.gov, 2019), and class III recalls focus on “ products that are unlikely to cause any adverse health reaction, but that violates FDA labeling or
manufacturing laws”(FDA.gov, 2019). The central part of product recall is a recall strategy developed by the pharmaceutical company. This strategy involves many aspects, such as the depth of a product recall, (Thirumalai and Sinha, 2011). The role of FDA is to oversee this strategy and check the accuracy of the recall. Pharmaceutical rms that recall products are also responsible for informing drug users about the recall and showing the recall status to the FDA. FDA is responsible for evaluating the effectiveness of a recall. If a company is not able to inform customers properly and remove the defective product from the market, then this recall is
considered ineffective. As a result, FDA will require the firm to take additional actions. An enforcement report will be published every week by the FDA. This report involves drug recalling events within the week.
4.2 Data and data source
This research focuses on investigating the relationship between the number of a firm’s outsourcing activity types and the possibility of its product recalling events. The moderating effect of the number of suppliers is also examined. Collected Data and corresponding database are given in Table 2.
Table 2 Collected Data and corresponding database
Data content Database
Recalling events FDA website buying firm information Lexis-Nexis database
The data for the independent variable and the moderator is from Factiva database. Factiva database is a global news database which includes approximately 33,000 sources. These sources involve licensed publications, influential websites, blogs, images and videos(Dow Jones, 2019). We gathered four-year news announcements (from 2013-2016) about buyer-supplier
relationships within the pharmaceutical industry in the United states.The keywords for data search are shown below
Considering the raw data is in the form of news, it needs to be coded for further data analysis. The information that needs to be coded from buyer-supplier relationship news includes the company names of the buyer and the supplier as well as the specific type of supply. During the coding process, the following types of news are considered as invalid data and then will be deleted. Firstly, the news that lacks information about the name of the buyer or the supplier is considered as invalid. Secondly, the news that lacks information about the specific type of supply is also deleted. Then, the news about stock exchange is deleted as the stock supply does not fit the definition of supply at the supply chain level. After the preliminary coding process, the information of type of supply will be recorded into 6 categories, which are R&D outsourcing, manufacturing outsourcing, marketing outsourcing, distribution outsourcing, technology
outsourcing and other service outsourcing. Examples for each category coding process are given below.
Table 3 Coding process
Third order codes Second order codes First order codes R&D outsourcing Research services ChemPartner will always
provide high-quality,
Manufacturing outsourcing Manufacturing
Cardinal Health is to custom manufacture Xofigo(radium 223 dichloride)for Bayer Healthcare
Marketing outsourcing Marketing An agreement between Celgene and OncoMed Pharmaceuticals has been finalized to co-develop and market about six anti-cancer stem cell(CSC)product candidates from the biologics pipeline of OncoMed
Distribution outsourcing Distribution Phibro Animal Health Corp:Acquires exclusive North American distribution rights for vaccines using MJ Biologicals,Inc.'s
Technology outsourcing license Advaxis,Inc and Global
BioPharma,Inc entered into an Exclusive License and Technology Transfer Agreement
other service outsourcing Consulting services will provide additional consulting service.
IT service Accenture,Eisai sign global IT outsourcing contract
Data on drug recalls was gathered from the U.S.Food and Drug Administration (FDA) website. This website provides detailed information about recalling events, which includes the recall initiation and termination dates, company information, the number and classification of the drug recall and the reason for this recall. We collected drug recall data announced from 2013-2016. Data collected from the FDA website are then matched with the data from Factiva database by the buying firm name to get a unique dataset of 830 different buying firms. Data on buying firm's detailed information comes from Lexis-Nexis database, includes ownership type and firm
Table 4 Variable definitions and measurements
Variable Definition Measurement
The likelihood of recalling events
Dependent variable Number of product recalls per firm from 2013-2016 The number of outsourcing
activity types
Independent variable The sum of outsourcing activity types per firm from 2013 to 2016
The number of suppliers moderator The sum of external suppliers per firm from 2013 to 2016
ownership type of buying firm
Control variable Whether the buying firm is private or public
buying firm location Control variable Whether or not the buying firm come from US
4.3 research method
numbers is much higher than the mean, hence the negative binomial distribution is more suitable for this research. The regression equation is given below:
Recalling events=exp (β0 + β1The number of outsourcing activity types + β2public + β3 private + β4United States +β5other countries)
5. Results
5.1 Descriptive and correlation analysis
In the following analysis, the number of a firm’s outsourcing activity types is treated as the independent variable, the number of product recalls is treated as the dependent variable, the number of suppliers is considered as the moderator, ownership type of buying firm and buying firm location are considered as control variables. For categorical variables ownership type of buying firm and buying firm location, they are coded to dummy variables. For categorical variable ownership type of buying firm, 1 means private, 0 means public. For categorical variable firm location, 1 means US, 0 means other countries.
Table 5 Descriptive statistics and correlations Variable Mean Std. Deviation 1 2 3 4 5 1.Private or Public 0.53 0.499 1 0.130** 0.007 0.074* 0.039 2.country(US or not) 0.61 0.487 -0.130** 1 -0.012 -0.023 0.022 3.The number of
outsourcing activity types
1.19 0.517 0.007 -0.012 1 0.633** 0.565**
4.The number of suppliers 1.34 1.234 0.074* -0.023 0.633** 1 0.471**
5.The number of recalling events
0.76 5.498 0.039 0.022 0.565** 0.471** 1
**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
5.2 Regression analysis: the number of outsourcing activity types and product recalling events
The hypothesized relationship between the number of outsourcing activity types and product recalling events is tested in this section, using negative binomial regression analysis. Two models are conducted to test the hypothesis. The first model involves all control variables and the dependent variable. Based on the first model, the second model adds the independent variable, the number of outsourcing activity types. Model 1 depicts the result that the control variable private has a significant negative effect on the number of recalling events(β= -1.019, p<0.001). In Model 2, the result reveals that outsourcing type numbers has a significant positive effect on the number of recalling events (β= 2.173, p<0.001). Hence, hypothesis 1 is supported.
Variables Model 1 Model 2 Control variable private -0.567 0.000 -1.019 0.000 public 0a 0a United States -0.296 0.000 -0.094 0.622 Other countries 0a 0a Main effect
The number of outsourcing activity types 2.173 0.000 AIC 1960,663 813,271 BIC 1974,827 832,157
From the result we get the model as below:
The number of recalling events=exp (-5.284+2.173 outsourcing type numbers-1.1019 private) The figure below shows the relationship between the number of outsourcing activity types and the number of recalling events. During the data analysis process, It is found that a focal firm outsources four types of business functions at most, hence the maximum number of outsourcing activity types is 4.
5.3 Regression analysis: the moderating effect of supplier numbers.
Table 7 Regression analysis: the moderator (Hypothesis 2)
Variables Model 1 Model 2 Model 3 Model 4
control variable private -0.567 0.000 -1.019 0.000 -0.971 0.000 -0.991 0.000 public 0a 0a 0a 0a United States -0.296 0.000 -0.094 0.622 -0.135 0.479 -0.042 0.833 Other countries 0a 0a 0a 0a Main effect The number of outsourcing activity types
2.173 0.000 2.000 0.000 1,131 0.000
The number of suppliers 0.127
0.070
0.751 0.000
Interaction effect
Outsourcing type numbers X the number of suppliers
-0.153 0.000 Intercept -0.714 0.000 -5.284 0.000 -5.237 0.000 -2.785 0.000 AIC 1960,663 813,271 811,642 779,519 BIC 1974,827 832,157 835,249 807,847
6.1 The relationship between the number of a firm’s outsourcing activity types and product recalling events.
Regarding the first hypothesis, the results of this study show that the likelihood of a product recall event is positively related to the number of outsourcing activity types. This finding is aligned with previous studies which indicated that outsourcing activity would increase the risk of final product quality failures and results in product recalling events（Landis et al., 2005; Steven, Dong and Corsi, 2014. Based on previous studies, this research further investigates the impact of multiple different types of outsourcing activities on product quality. It is surprising to observe that as the number of outsourcing activity types increases, the number of recalling events increases so rapidly. For example, In a four-year period，when the number of a firm's outsourcing activity types is 1, the number of recalling events is 0.045. when the number of a firm's outsourcing activity types increases to 4, the number of recalling events is 30.2, almost 678 times the former. Considering that the most common outsourcing activity types are technology outsourcing and R&D outsourcing for the focal company in this research’s dataset, this finding can be explained by the study of Kaya and Özer(2009). Kaya and Özer(2009) pointed that when a focal firm outsources knowledge-intensive business functions, it is more difficult for the focal firm to measure and assess the quality of external suppliers’ service, which brings higher quality risks in outsourcing.
The research brings some theoretical contributions. Firstly, when investigating the negative influence of outsourcing activities in terms of product quality risks, most of the existing literature starts from two perspectives. Many studies treat outsourcing as a whole(Kaya and Özer, 2009; Lu, Ng and Tao, 2009; Marucheck et al., 2011 ). In addition, there is also considerable prevailing literature focus on single specific outsourcing activity type(Ahmed, 2006; Cai et al., 2013; Gilley, Greer and Rasheed,2004). This research may provide a new perspective for scholars to investigate the relationship between outsourcing and product quality failures by investigating the impact of multiple different types of outsourcing activities. Secondly, this research focuses on investigating the cause of recalling events in the pharmaceutical industry. This may enrich studies of the reasons for recalling events as there are limited relevant studies focused on the pharmaceutical industry.
6.2 The moderating role of the number of suppliers
opportunistic behaviors (Steven, Dong and Corsi, 2014，Kang et al., 2012). The result of this study shows that when a firm increases its outsourcing activity types, a higher number of
suppliers will make the focal firm more possible to avoid product recalling events. This would be in accordance with the study of Costantino and Pellegrino( 2010) who shows that a higher
number of suppliers will increase competition among them and leads to better product and service quality. This finding also can be explained by the study of Cox(2001) who shows that a buying firm with more suppliers will have more power compared with its suppliers, as this buying firm is able to switch to another supplier with a lower cost and be less reliant on a certain supplier. Under this situation, the power asymmetry between a buying firm and its suppliers makes suppliers more likely to behave as the buyer expects.
Some practical evidence also supports this finding. The pharmaceutical industry is a highly regulated industry, companies are strictly regulated by governments in this industry(Gray, Roth and Leiblein, 2011). Regulatory pressure from governments and other agencies may make suppliers less likely to develop opportunistic behaviors and make more efforts to quality
management, hence the negative influence of the number of suppliers on product quality may be mitigated.
This finding may contribute a bit to studies related to the number of suppliers. The result of this study indicates that when investigating the influence of different supplier numbers on supplier opportunistic behaviors, scholars need to consider the specific industry which the suppliers belong to. Suppliers in different industries may be expected to have a different level of motivation for opportunistic behaviors.
6.3 Managerial Implications
the possibility of recalling events. In addition, for buying firms in the pharmaceutical industry, considering that this industry is a highly regulated industry and supplier firms are strictly regulated by local governments and other agencies, it may be more beneficial to increase the number of suppliers as increased suppliers can help to reduce the possibility of recalling events.
6.4 Limitations
There are a few limitations for this research. First, this study only collected data for a four-year period. Using a panel dataset of more years may allow for more accurate investigation of the relationship between the number of outsourcing activity types and product recall events. Second, buying firms in this research involve private firms and public firms. It is difficult to obtain more detailed information (e. g. Firm size, Firm age) about private firms. Hence the number of control variables for this research is low. Thirdly, this study is limited to the pharmaceutical industry in the United States areas.
6.5 Conclusions and suggestions for future research
The main objective for this research is to further investigate the effect of outsourcing on the recalling events. The aim of this study is to explore the relationship between the number of outsourcing activity types and recalling events. From the results of this research, it is clear that when the number of outsourcing activity types, the number of recalling events will increase rapidly. Furthermore, this research also states that a higher number of suppliers will help to decrease the number of recalling events. But this finding may be limited to the pharmaceutical industry as this industry is highly regulated by governments and other agencies.
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