Insourcing as Spatial Supplier Integration - Empirical

Insourcing as Spatial Supplier Integration - Empirical Observations and Theoretical Implications

Jorg Fretting, Ruhr University ofBochum, Bochum" Christina A. Sieger, Ruhr University ofBochum, Bochum

Abstract

Insourcing - as a crucial element of contemporary purchasing management - can be practiced in a way of both vertical integration and spatial integration of outside suppliers. Understood in the latter sense, insourcing offers important opportunities of close customer/supplier collaboration improving effectiveness as well as efficiency. Highlighted on the background of transaction cost economies and the resource-based view, it is possible to contribute to a deeper analytical understanding of the insourcing concept.

Introduction

Outsourcing has been one of the main topics of purchasing management during the 1980's and 1990's (e.g. Ford/Farmer 1986; Quinn 1992; Welch/Nayak 1992; Venkatesan 1992; Greco 1997). However, not all of the outsourcing arrangements which have been established recently were completely satisfying (e.g. Bettis et al. 1992). Especially from the customer's point of view there have been some important drawbacks with regard to managing the new customer/supplier interfaces. Beside some important benefits by making use of external sources, for example pointed out by Welch/Nayak (1992, p. 23), the customer's main problems usually are the following: losing important know-how, eroding firm-specific capabilities, and becoming dependent on the supplier.

In the face of these facts, more and more customers are looking for new modes of interfirm cooperation avoiding the disadvantages of outsourcing arrangements as well as benefiting from the strengths of the suppliers. Such new modes should guarantee a satisfying amount of control of the supplier base and help to avoid too dangerous states of dependence on key suppliers. Moreover, the arrangements should follow the synergetic principle in a way of closer supplier/customer collaboration. This could even be useful in order to maintain a customer's set of skills and capabilities. Following the 'insourcing concept' is one important way to respond to the challenges outlined above. With regard to insourcing there are some important aspects to be addressed in this paper:

* Jorg Freiling, Christina A. Sieger, both Faculty of Business & Economics, Dept of Marketing Ruhr University of Bochum, D-44780 Bochum. Germany. Phone: --49 234 7002248. Fa.v r-t-49 234 7094272, email: joer^.i'Yjb.'U: :/ ! ^b> -u?r i^>-.: ; :•:••• J The authors express the for helpful discussions and comments received by Werner H. Engelhardt and Peicr Hammann.

i/i (VIcLoughlin, Damien. and C. Horan (eds.). Proceedings of The 15th Annual IMP Conference.

University College, Dublin 1999

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What does insourcing mean?Where do we find insourcing arrangements in industrial marketing and purchasingand what are they like?How are insourcing arrangements performed in practice?How is it possible to analyze insourcing arrangements in theoretical terms?Is insourcing just a fad of marketing and purchasing management?

Basics of the Insourcing Concept

Insourcing - as inside resource using - has different meanings and can be established in quite different ways. First, insourcing can mean nothing else but turning a "buy" situation into a "make" situation. This process is a matter of traditional ways of vertical integration or re-integration, respectively, well-known from literature. Secondly, another type of insourcing describes the process of a spatial supplier integration. In this case, a supplier is expected to move permanently to the customer's site, in order to improve coordination between the partners due to the short distance. Relying upon the fact that the second form of insourcing is still "under-researched" but gaining more and more significance in industry, we decided to focus on the following type by identifying some examples and analyzing them afterwards:

insourcing as durable spatial supplier integration on the customer's site.

Actually, in some industries, i.e. the automotive sector, such insourcing arrangements have already been established for a longer period of time. In other industries, however, at least short-time insourcing agreements represent traditional means of interfirm coordination. Especially by taking a look at the marketing respectively purchasing of plants, there are well-known causes and occasions to make use of different forms of spatial supplier integration. Engineering, field-assembly operations, the start-up, training customer's personnel, trials, repairs, and maintenance are several reasons why project-related supplier integration is necessary. In these cases insourcing takes place due to the necessity of close coordination between customer and supplier. However, there are more recent examples of integration suppliers on customer's site. Especially operation concepts based upon license respectively cross-license or lease agreements all indicate the same direction.

The question arises whether this insourcing as spatial supplier integration is really providing greater benefits in comparison with standard outsourcing arrangements. Superficially, one might expect some advantages with regard to the three critical success factors time, quality, and cost, such as

reductions of delivery times and speeding up new product development by theadvantage of the "shortest way",

- improvement of product quality as well as process quality by making customer'sand supplier's quality management systems fit together,cost reduction by getting rid of some stores, avoiding a lot of transportation costs,and using capacities more efficiently.

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On the background of the meaning of insourcing and its significance in industrial marketing it is now of interest to concentrate on the question how insourcing arrangements can be performed in practice. Hence, it was necessary to start an empirical study.

Insourcing Arrangements: Empirical Observations

The aim of the empirical study was to identify industries where insourcing agreements are gaining ground and to study and compare the different ways of making spatial supplier integration work. Moreover, it was intended to gain insights into the specific strengths and weaknesses of practicing insourcing in a duruhlc way It is to be pointed out that the intention of the study was not to deliver a representative impression about insourcing in different industries. This could be subject to ongoing examinations. At this early point of time in establishing insourcing arrangements, the aim was to find out a few pilot cases well-fitting to the subject matter. Hence, a research method needs to be chosen which would be appropriate to get an insight into different forms of insourcing arrangements. As insourcing implies a durable process of adaptation between supplier and customer it seems to be appropriate to follow the proposal by Brennan and Turnbull (1998) to use a case study approach for investigating the development of the interconnected buyer/seller situations. Data material for these case studies was collected from several depth and telephone interviews. Two to four interviews were conducted with regard to each firm. The use of depth interviews was necessary in order to find out some more details about the established insourcing designs. Telephone interviews were helpful in case of getting a complete impression about firm-specific circumstances. The interviews were carried out in a form of explorative, non-standardized surveys in order to get an extensive collection of information and opinions.

As there is only a limited number of firms making use of insourcing in the sense of this paper, the first question was about adequate industries. By selecting industries there was to consider that project-related spatial integration of suppliers should not be the focus of the study due to the limited horizon of time. Therefore, plant engineering or similar industries are no promising choices. Instead, in the automotive industry there is an increasing number of car producers working together with "preferred suppliers" in a quite intensive way, even favoring spatial supplier integration. Beside that, in the software industry more and more software firms try to establish long-lasting customer relationships by enhancing their degree of customer orientation. Therefore, some firms try to develop comprehensive service concepts even containing the dispatch of employees to work on customer's site for a longer period of time. In order to give some insights into possible ways of insourcing in practice this paper presents findings of three automotive component and two software firms in Germany, France, and Switzerland. A summary of project-specific experiences is given below.

Empirical Findings in the Automotive Industry

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Regarding the dynamic development of customer supplier relationships in the German automotive industry it is to state that after a long period of outsourcing activities some manufacturers now try to integrate supplier^ in their own factory pivmi>cs. In order lo give a more precise impression of problems and chances of this strategy, interviews with three German automotive manufacturers and suppliers were conducted. Generally speaking, all of the firms were able to strengthen the relationship and could improve their current position in global competition.

The first case of spatial supplier integration between the Bochum plant of the Adam Opel AG, Russelsheim, and his supplier for seats, Johnson Controls, can be classified as an insourcing partnership on a low level. Indeed, the points of interaction between the staff of customer and supplier are rarely, even though the supplier's location is very closely to his main customer Opel. To achieve more efficiency throughout the cooperation, both firms decided on the following agreement: Three employees of JC are continuously working Opel's plant in order to control the delivery of seats and support Opel's staff at the assembly line. After getting over some initial problems, positive effects were stated on both sides. On the one hand Opel was able to realize cost cuttings as the whole organization of quality examination and responsibility of the seats was transferred to the supplier. On the other hand the permanent proximity of supplier and customer implied for JC the possibility to offer more kinds of services as for example sorting out defective seats and replacing them in a short time. In general, this insourcing project can be characterized as a typical just-in-time exchange relationship (Frazier/Spekman/O'Neal 1988) having great advantages due to the location,

The next case deals with an insourcing arrangement realized by Volkswagen's plant Salzgitter and the supplier Techno Chemie (TCH), Karben, responsible for various components and modules. In contrast to the case before, this partnership reveals a very intensive insourcing implementation. Against the background of several incidents like for instance unutilized areas and the need of cost-cuttings, Volkswagen decided to initiate a new form of collaboration. As a matter of fact, TCH moved with a part of production and service facilities to the location of his customer and was offered the existing infrastructure for their own production. The only condition was to place VW's staff in the suppliers production. Needless to say, that this form of integration would have tremendous effects especially on activities of logistics and production management.

Furthermore, the reduction of coordination problems and costs concerning the just-in- time-production, the improvement of the relationship due to life-time contracts and the possibility of having access to the partner's resources were of great value for supplier and customer. With regard to the initiating stage, it is to be stressed that VW \\as willing to establish a new department called "strategic insourcing" in order to support TCH with regard to production and quality problems, which arose at the new location To sum it up, this example clearly illustrates that conducting an insourcing strategy has a positive influence on different operational areas of the firm's organi/ation. Moreover, both partners reported considerable improvements with regard to the atmosphere of the relationship. Concerning the Turnbull/Valla (1986) model the following aspects were addressed: - turning a power asymmetry into a power balance-like situation,

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- reducing non-productive kinds of conflict,- reducing the "social distance" between the parties.

The last interview with regard to the automotive industry was conducted with the Micro Compact Car GmbH (MCC) in Hambach. This form of spatial supplier integration is of great interest, as the two parent companies Daimler-Chrysler and SMH established a new industrial park" in order to manufacture the jointly invented city car 'smart 1 . In terms of the car concept it is to remark that product development and production were a complete innovation. The architecture of the car consists of a few large modules and systems, which should be outsourced and produced by a small number of suppliers. Some special conditions as i.e. financial and human capital constraints and a limited time for development led to the idea of establishing a close interaction between MCC and five carefully selected partner suppliers.

MCC worked out a life-time contract with every partner and gave the whole responsibility for specific modules to be integrated into the system 'smart' to the respective supplier. MCC's part in the project was to act as a central coordinator in order to define production standards, improve process flows and facilitate the coordination to build up an efficient insourcing network.

However, conflicts especially due to high quality standards and extreme flexibility were common in this project. As a result, it is to remark that this arrangement differs from the ones before. As figure 1 indicates, this insourcing approach is determined by the assembly process and the clearly defined location of every system partner. This structure guarantees an efficient process of value creation.

In order to summarize the reveals of the insourcing arrangements in the automotive sector, the following statements give a short overview:

Opel and JC have established a dyadic relationship because JC is the only seat supplier. Furthermore this insourcing cooperation only concentrates on resource ties (Hakansson/Snehota 1995).

VW and TCH established the same form of relationship because it is dyadic and concentrated on resources. A strict division of labor in the partnership limits learning effects.

The interaction between MCC and the system partners, instead, is network- orientated. However, the relationship supports having access to the same resources rather than learning from other partners.

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Assembly Interior/ Exterior

Cover-Parts

Doors

Quality Control, Ignition of the

completed vehicle's engine

Delivery

ProductionPreparation

Center

tasks to be performed by MCC

tasks to be performed by MCC's system partners

Fig. 1: MCC's insourcing approach

Empirical Findings in the Software Industry

The question arises why insourcing arrangements could be interesting for firms in the software industry. Software firms are working in rather dynamic market conditions. Quite often business is technology-driven and very many customers are not aware of the various opportunities, new software solutions are offering. Moreover, there is a great number of customers in business markets demanding specific software solutions as well as lots of services around the software. With regard to the fast-developing opportunities of using software and the permanently changing market situation, customers often realize substantial uncertainty of making wrong decisions when software solutions are to be acquired. It is possible to state that the experience qualities are decreasing and credence qualities (Nelson 1970; Darbi/Karni 1973) are increasing in such a way that the business is converting into "credence transactions" Keeping this background in mind, it is not astonishing at all that very many firms tried to outsource their departments of information systems and to rely on competent partners.

Software firms were quite alert in the past and recognized their tremendous business opportunities. More and more customers need full service offerings and up to now the software suppliers are ready to provide. Only a few firms are seriously engaged in establishing and developing insourcing arrangements. Two sample firms, one located in Switzerland (Oracle Switzerland), the other in Germany (EDS Germany), tried out different ways of durable supplier integration on customer's site.

One of the most famous examples of insourcing as spatial supplier integration is EDS, indeed. When General Motors made the decision to outsource its IT department, GM's

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subsidiary EDS established an outsourcing approach basing significantly upon insourcing elements. EDS was providing many IT-related services on GIVTs site. The situation occurs at GM's headquarter in Detroit as well as at GM's German subsidiary. Opel, well-known from the example above. There are many Opel plants where hDS manages the IT systems. However, this close collaboration with the parent company is not the only insourcing project, EDS Germany is involved in.

There are some key accounts of EDS Germany demanding special software applications in order to turn traditional process management into a computer aided one or to manage computer aided processes in a better way. Especially some key customers in the telecommunication industry and in public administration are demanding such specific solutions. There are some major difficulties for the software provider to match the requirements appropriately EDS Germany realized that in some cases only a close collaboration on the customer's site could be an adequate response. Therefore, EDS software engineers were sent to the customer in order to acquire customer-specific know-how Basically, it is very important to know exactly, how the processes of the customer work and what kind of problems the staff of the customer realizes, in order to match customer requirements. Especially in the public administration sector there are several administrative regulations to be considered when specific IT solutions \\ill be developed. Without a precise understanding of such requirements, the software engineers are not able to make the right decisions. Therefore, quite often implemented solutions need to be reconsidered because of non-conformance to certain internal process requirements of the customer. In other words, the hl)S personnel has 10 get lo know customer's processes almost as well as customer's staff itself. The role turns from software engineering to business process consulting in a certain way.

It suggests itself that insourcing as spatial supplier integration could be a useful means to get these problems managed. Furthermore, permanent or quasi-permanent presence of a team at the customer's site is a basic supposition in order to strengthen customer ties by providing software-related services. Customers report that there are certain problems by using software almost every time. In most cases the problems are urgent because important processes do not run anymore. When a quick response by the software provider is needed, supplier's task force usually faces serious problems because the detailed knowledge about the specific hardware/software configuration is lacking. It takes some precious time to analyze the specific situation. EDS made the experience that lots of these problems can be solved by insourcing arrangements. Members of the staff are assigned to the key account and quite often they spent predominant parts of their working hours at the customer's site. Their job is about providing the following software-related services: software consulting, process consulting, implementation, education of customer's staff, troubleshooting, maintenance. Nowadays, HDS is quite satisfied with such arrangements. Therefore it is not astonishing at all that insoureing has become an integral part of EDS's marketing strategy

The problems the other sample firm, Oracle Switzerland, located in Bottmingen near Basel, faces, are quite similar problems to the EDS ones. However, there are some important differences with regard to the realized insourcing agreements. Whereas EDS established more or less informal insourcing projects with customers, Oracle decided to go a more formalized way. In detail, Oracle established a modular system of "support



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service offerings' 1 . The different modules enable Oracle to match standard requirements of non-key customers on the one hand and specific, intensive requirements of key accounts on the other hand more precisely. Insourcing solutions are pail of Oracle's support service offerings, promoted under the slogan "a dedicated Oracle support center at your site" Core elements of Oracle's insourcing is a support account management where one or more service people are delegated to the customer's site with the only task to manage key account's software-related problems. This support account management is subject of service contracts between Oracle and some special key customers, As Oracle reports, the service people are predominantly utilized with their jobs because usually customer's staff realizes several different problems which will not be articulated in case of conventional troubleshoot visits by the software provider. In case of permanent presence, an atmosphere of trust in Oracle's expert is often created. This leads to a deeper understanding of customer's problems and to several possibilities of product and service improvements, deepening the relationship.

However, this close and trustful cooperation does not only cause increasing customer loyalty but is very useful, indeed, when Oracle is trying to gather information about competitors. Even in insourcing projects, the staff of the customer is willing to give crucial hints about competitor's actions. Furthermore, customers are more willing to give information about Oracle's position in the market compared with the relevant competitors. Another exciting opportunity of Oracle as insourcing partner is the chance to manage so-called ''business migration" projects. Those business migrations express the switch of one software supplier to another. In case of those switches, Oracle has to analyze the former software solution and to install a completely new one. The result is that Oracle learns very much about the way competitors implement customer-specific software applications. All those aspects clearly indicate that insourcing in this way can be a proper means to achieve competitive advantage. Usually, this way of insourcing ("Oracle I") is only appropriate in case of big key accounts.

Nevertheless, Oracle was thinking about ways to make use of insourcing without such a high engagement but for a greater amount of - maybe even small - customers. By trying to find a solution, Oracle recognized the serious problem that there are not enough qualified software engineers available in order to guarantee a satisfying service level. The staff was fully utilized by managing the actual customer base. Therefore, Oracle decided to establish a network of small-sized partner firms and to bond them in a close way ("Oracle II"). Those small-sized firms are quite flexible, specialized to a very high degree, and realizing a low level of overhead costs. Some of them have substantial experiences with Oracle software. As those firms were usually very reliable, they seemed to be perfect partners in order to provide software-related services in insourcing-like circumstances even to smaller customers. The basic idea of Oracle was networking in a well-harmonized way. Oracle is engaged in this network by delivering standard software applications and developing new versions based upon feedback information from the market. The partner firms manage substantial parts of the distribution and service process - to a large extent at the customer's site. Closeness to the customer and learning one from another can be achieved this way However, this network cooperation is different from the industrial park, arranged by MCC One main difference is that MCC's industrial park is characlen/ed b\ hori/ontal relations between

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the system partners, whereas the Oracle network is based upon vertical coordination between Oracle and the service provider.

Despite the fact that in literature some other examples of insourcing or insourcing-like arrangements in IT markets can be found (i.e. Dyer 1996), we can summarize the results of the empirical observations in the software industry concerning the insourcing designs as follows:

EDS makes use of a dyadic approach: Customers and supplier interact without theintegration of third-parties into the agreement. Furthermore, the insourcingphilosophy of EDS mainly rests upon mutual interaction and learning one fromanother. The pooling of certain resources is only the basis but collaboration betweencustomer and supplier goes far beyond this.Oracle design I has exactly the same orientation. The character of these directsupport approaches are dyadic and learning-orientated.Oracle design II, instead, is network-orientated in a way that Oracle establishes avalue chain including at least three firms on different steps. Learning between thepartners is one major goal of this insourcing design.

General Comments

The findings of the study revealed that there was no general mode of insourcing. Almost every firm was establishing a special insourcing approach. Despite the limited number of participating firms in the study, it was possible to identify precisely two basic dimensions characterizing the different modes in practice. The first discriminating variable was the number of participating parties in one insourcing approach. On the one hand, there were some bilateral arrangements, both in the automotive and the software industry. On the other hand, more complex arrangements were realized when a limited number of firms was collaborating on the purchaser's site. These cases represent network coordination. The second dimension refers to the mode oj cooperation. Sometimes, the partners of insourcing arrangements preferred a division of work, in other cases partners worked closely together and tried to perform their tasks jointly. In the latter case, the insourcing arrangement can be characterized in terms of learning partnerships instead of "simple" resource pooling. Keeping the two dimensions in mind, it is possible to develop a typology of insourcing arrangements with four different types:

dyadic resource pooling, networked resource pool,

- learning relationship, learning network.

As shown in fig. 2, every type has at least one corresponding example of the case studies cited above.

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dyad

network

focus: resource pooling

focus: competence building

* Johnson Controls/Opel Bochum

* Techno Chemie/Volkswagen:

* Oracle (I): direct support approach EDS

industrial park of MCC

* Oracle (II): indirect support approach

Fig. 2: Typology of insourcing arrangements

Empirical evidence suggests that in every case the results of the established insourcing arrangement were satisfactory. Not a single firm of the study intends to drop insourcing because of substantial benefits realized in the past. According to the interviews the following advantages appear to be striking:

realizing economies of scale as well as economies of scope,- reducing failure rates,- increasing the probability of meeting delivery deadlines exactly,

avoiding some efforts of transportation, finding new ways of improving the customer/supplier relationship.

However, there are some pitfalls with regard to the established solutions. Especially the close cooperation, necessary to make insourcing possible, was sometimes hard to handle, even if purchasers established insourcing networks (i.e. the "industrial park" of Micro Compact Car producing the 'smart'). Nevertheless, MCC has been reporting to get its coordination problem solved after all. To sum up, it is to state that all empirical findings of the case study are preliminary but they reveal some important aspects characterizing insourcing arrangements as especially the changes in structure of coordination and the establishment of common resource pools.

Theoretical Implications of Insourcing

Keeping the above mentioned empirical results in mind, it is now necessary to focus on the question how insourcing arrangements can be explained by the help of economic



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theories. Although there are several useful theories, especially transaction cost economies and the resource-based view appear to be highly appropriate The transaction cost perspective offers important insights into the problems of quasi-hierarchical coordination. Furthermore, it helps to explain the underlying transaction designs of insourcing agreements and the finding of new promising modes of collaboration. Also the question of dyads versus networks can be addressed in terms of transaction costs. Moreover, it is further possible to analyze the concepts of adaptations and networks in order to explain the aspect of durable and specific investments made on both sides.

The resource-based view represents another promising approach to analyze important aspects of insourcing more deeply. With the help of this approach insourcing arrangements can be subdivided into resource pooling partnerships on the one hand and competence partnerships on the other. This differentiation is useful in order to analyze the specific advantages of compensating resource gaps in looser outsourcing relationships by spatial supplier integration. Moreover, the competence construct explains the increasing effectiveness of learning partnerships by dealing with aspects of knowledge accumulation, competence building, and competence leveraging.

A Transaction Cost Analysis of Insourcing

Basically, the transaction cost approach (C'oase 1937; Williamson 19;s5) uddiessea ihc economic coordination of activities in the face of uncertainty, asymmetrically dispersed information in the market process, and the possibility of opportunistic behavior of exchange partners. In order to respond to these challenges, economic actors behaving bounded rationally (Simon 1976) - have to arrange transaction designs. Those transaction designs are useful to the actor in order to monitor the transaction efficiently. A well-fitting transaction design guarantees a satisfactory protection against the numerous threats of the market process. However, this protection is a costly matter, as arranging transaction designs causes transaction costs of the different kind (Williamson 1985; North 1990). Therefore, finding out appropriate transaction designs matching the environmental situation is one matter to be addressed, to compare the different designs with regard to transaction costs is the other.

In this context, the question about the relevant criteria in order to determine the appropriate transaction design arises. As Williamson (1985) points out, there are three important determinants of transactions, having significant impact on the level of transaction costs: (asset) specificity, uncertainty, and frequency. According to the special relevance of the three dimensions to a transaction, a transactional design between market and hierarchy (Williamson 1985) is to be chosen, f-speciallv Richardson (1972) points out the relevance of "coordination by cooperation" as an intermediate type between the two extremes. For example Dwyer/Schurr/Oh (1987) highlight long-term partnerships in order to get access to lacking resources This case is relevant to some insourcing case studies, too, as cited above.

By analyzing insourcing arrangements in terms of transaction cost theory more closely, the transactional dimension specificity needs to be stressed. Indeed, the establishment of a close interfirm cooperation, like the insourcing partnership, demands specialized investments on both sides. This can be definitely confirmed by the example of MCC

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and its system partners. All of them need to make asset-specific investments in order to build up the insourcing network. Hakansson and Snehota (1989) recognized that establishing a network requires particularly the constitution of a framework for the bilateral exchange processes, Within this frame, it is possible to get access or even exploit resources of the other partners. This can be definitively confirmed by the example of MCC and its system partners. Even MCC has to make considerable specific investments with regard to the supplier relationships. Williamson defined four different types of transaction-specific investments (Williamson 1985): human asset specificity. physical asset specificity, site specificity, and dedicated assets. With regard to an insourcing partnership, site specificity plays an important role. Due to fact, that supplier and customer are in close proximity (Dyer 1996) the coordination of product development, quality assurance and logistics is likely to be improved.

However, substantial investments in durable assets by one partner are dangerous if the other one tends to behave in an opportunistic way (Frazier/Spekman/O'Neal 1988). In this case, the partner who makes the specific investment is able to generate quasi-rents (Klein/Crawford/Alchian 1978), although they are in danger to be exploited by the other party. Despite the fact, that within insourcing cooperations this problem is particularly acute due to the need of specific investments, one can argue, that opportunistic behavior only leads to failure and high transaction costs and reduces the efficiency of the exchange partnership extremely. Another important aspect of specificity refers to the assumption that, if high transaction-specific investments are involved, a "small-number situation" is likely to arise (Williamson 1985). Referring this to the examples of dyadic partnerships, it is to notify, that a transition of former multiple sourcing activities to a single sourcing relationship took place. Furthermore, this "small-number situation" may easily turn to a form of bilateral monopoly (Machlup/Taber 1996). In this situation both partners face the problem of high switching costs, which, of course, causes considerable lock-in effects and states of mutual dependence. The case of TCH and VVV shows this development clearly. By establishing the insourcing strategy, supplier and customer increased their interdependence due to the fact that plant and equipment are characterized by special technical attributes. Hakansson/Gadde (1997) describe the phenomena as a process of adaptation, where supplier and customer try to adapt themselves by concentrating on a selected partner and guaranteeing priority concerning the transaction processes.

By establishing the insourcing strategy the interdependence increased when TCH moved to the customer's location. In addition to that, both parties underlie the condition of no third-party agreements. This shows that the need for a collaborative atmosphere and the long-term orientation appears fundamentally, in order to perform a successful implementation and to achieve any reduction in transaction costs.

According to the transaction costs perspective, uncertainty is another important dimension, influencing the level of transaction costs (Williamson 1985). When a relational exchange takes place, generally both parties encounter a situation of uncertainty characterized by infrequent communication, opportunism, and asymmetric information. In order to control such a situation, cost intensive transaction designs tend to be appropriate because of providing specific safeguards and regulations Therefore. both transaction partners tend to decide on hierarchical or hierarchy-like exchanges m

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order to afford direct control and to find out the 'optimal' level of transaction costs. By transferring these problems on an insourcing partnership one comes to the conclusion, that initially both partners are faced with high uncertainty because a competent partner for the project needs to be found. Nevertheless, the transaction costs necessary in order to reduce uncertainty can be compensated in the following time, on the condition that both partners have interest in a closely coordinated and confiding relationship. Integrated production processes and a common product development may encourage this project. Moreover, the level of bilateral asset specificity and interdependence in an insourcing arrangement is quite high, due to common resource ties. This leads to the opinion that the risk of opportunistic behavior is under control.

The third dimension addresses the frequency of transactions (Williamson 1990). If both partners have interest in increasing the number of exchanges, they can profit from the average reduction of transaction costs. This advantage plays an important role in an insourcing cooperation as the close proximity of customer and supplier enables them to use the same infrastructure and resources. Furthermore, it is becoming easier to build up a firm and confiding atmosphere. In addition to that, economies of scale and economies of scope within the coordination of transactions can be realized.

Against the background of the above mentioned three dimensions, influencing the level of transaction costs and the transaction design of the relationship, it is now of special interest to classify the governance of insourcing partnerships. Relying on the assumption that implementing a spatial supplier integration leads to a higher degree of specificity and interdependence in the partnership, it is obvious, that the cooperation tends to convert from looser kinds of relational exchange in a hierarchy-like situation (Stuckey/White 1993).

In general, the types of insourcing arrangements can be discussed by addressing the types of vertical governance. Baur (1990) promotes a subdivision in different modes: the vertical integration forms based on control and vertical integration forms based on cooperation. The first type of vertical integration is quite similar to hierarchical exchange. It describes a partnership with a power advantage of the customer, who maintains direct control over essential resources and the supplier's position (Blois 1996). In contrast to this, vertical integration forms based on cooperation can he characterized by the key features confidence, mutual responsibility, and collaboration in special functions e.g. product development (Baur 1990). Given the above mentioned features of an insourcing partnership involved, one comes to the conclusion that vertical integration based on cooperation are not well-fitting because of the moderate degree of interdependence. Therefore, it seems to be appropriate to concentrate on the three types of vertical integration firms based on control. Aside from the governance structures quasi-vertical integration (Monteverde/Teece 1982) and vertical quasi-integration, the de-facto vertical integration contains various elements being representative for insourcing arrangements. Teece (1982) points out that this form of vertical integration develops due to a situation of site specificity. With regard to insourcing, the supplier is usually the one who needs to invest more specifically than the customer and this leads to an increase of the supplier's dependence on the customer in the relationship. Indeed, many insourcing arrangements appear similar to this transaction design, as it is revealed by the empirical findings. Site specificity, due to the supplier integration in the

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customers location and production processes, is one of the key elements in this relationship.

Despite of this, one cannot come to the conclusion that all kinds of spatial supplier integration are organized extremely hierarchical. The project of Opel and JC shows the opposite direction. This cooperation is determined by a moderate level of vertical integration and interdependence. In contrast to that, the insourcing approach of MCC required idiosyncratic investments on both sides and led to a type of hierarchical exchange, due to the fact, that MCC acts as the central coordinator of the whole cooperation.

As a result, it is to remark, that the transaction cost perspective gives some interesting hints in order to explain the advantages of an insourcing cooperation and their different forms of cooperation. Especially insourcing appears to be an adequate transaction design if strategic matters are to be coordinated, involving a high degree specificity as well as uncertainty and frequency.

Insourcing and the Resource-based View

The resource-based approach is especially useful in order to address the distinction between resource pooling and learning orientated insourcing arrangements. The basics of the resource-based view, relevant in this context, can be summarized as follows 1 :

Uncertainty in economic decision-making and incomplete markets cause asymmetries concerning the dispersion of information and knowledge between economic actors as well as long-lasting differences between firms with regard to firm-specific resource endowments,Firms are developing idiosyncratically. Making economic decisions leads to irreversibilities and commitment to a specific organizational path (Ghemawat 1991).Therefore, firms appear heterogeneously in the marketplace caused by specific resources. Many authors promote the notion that especially intangible resources are the drivers of heterogeneity (i.e. Hall 1992). Without trying to proof that, especially firm-specific capabilities and competences are usually dominant variables when sustainable competitive advantage of single firms in the market process is to be explained (i.e. Hamel/Prahalad 1994). According to Sanchez/Heene/Thomas (1996, p. 7-8), capabilities can be understood as "repeatable patterns of action in the use of assets to create, produce and/or offer products to a market", whereas competences reflect the "ability to sustain the coordinated deployment of assets in a way that helps a firm achieve its goals"A path-dependent development of firms does not only help to explain heterogeneity of organizations. Moreover, firm-specific decision-making leads to the accumulation of idiosyncratic knowledge which is basic in order to perform activities in a way providing superior benefit to the market. As a result, by making use of such

1 Founded especially by Penrose 1959, Teece 1982 & 1984, Rumelt 1984, and Wernerfelt 1984, there were very many follow-up publications making significant contributions to theory development, such as Barney 1986 & 1991, Grant 1991 & 1995, Dierickx/Cool 1989, Amit/Schoemaker 1993, Peteraf 1993, Hamel 1994, Sanchez/Heene/Thomas 1996, Sanchez/Heene 1997.

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knowledge companies are able to develop unique capabilities and which can hardly be imitated or substituted by competitors because (here are certain barriers, in resource-based literature called "isolating mechanisms" (Rumelt Those mechanisms described more detailed in literature (i.e. Dienckx ( ool Teece/Pisano/Shuen 1990, Barney 1991, Freiling 1997) are especially tacit knowledge, social complexity, asset mass efficiencies, time compression diseconomies, and causal ambiguity.

The existence of asymmetrical resource endowments between firms is a basic reason why firms are engaged in interfirm collaboration. Sanchez, Heene, and Thomas (1996, p. 7) use the term "firm-addressable resources" in order to stress that there are important assets outside the firm "which a firm does not own or tightly control, but which it can arrange to access and use from time to time" Those firm-addressable resources are one of the main subjects of insourcing arrangements, indeed. Insourcing helps to achieve that accessing firm-addressable resources will be put forward in a more goal-directed way Usually, cooperation does not guarantee that partner firm's assets can be accessed more or less exclusively. In case of insourcing as spatial supplier integration the situation turns around. Some assets of the supplier will be dedicated to the customer for a longer period time, usually well-matching customer requirements. This situation illustrates that the Sanchez/Heene (1997) distinction between firm-specific resources residing inside the firm and firm-addressable resources residing outside the firm should be complemented by resources being both firm-addressable and firm-specific simultaneously This hybrid state of some critical resources even helps to explain why it is possible for firms to make use of outsourcing payoffs while avoiding its pitfalls \\hen insourcing takes place.

With regard to insourcing, there are two main reasons for cooperation becomingimportant:

The insourcing project is gap-orientated: The gap, caused by missing or underdeveloped resources of the customer, needs to be closed by the help of the supply side. With regard to fig. 2, a distinction makes sense. There are on the one hand side insourcing arrangements with only one supplier working on the customer's site. On the other one there is a network of suppliers collaborating according to customer's requirements in ways such as the industrial park highlighted above. The pooling of resources is the key to partnership success. However, the partners are working more or less independently, as there is a partition of work with only a limited number of tasks to be performed jointly.

- The insourcing is learning-orientated: It is not enough to pool supplier's and customer's resources at the customer's site. Moreover, it is an explicit goal of the collaboration that the partners should learn one from another. The production of partnership-specific knowledge is maybe the most crucial part in order to further competence building.

With regard to gap-closing partnerships based upon a more or less close division of work between the partners, it is necessary to take a look at the possible intentions of pooling firm-specific resources. One main cause to collaborate is asset complementarity. The supplier controls critical resources the customer cannot access immediately. In this case there is a qualitative divergence in resource endowment

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between the partners. The assembly and maintenance team of Johnson Controls working at the Opel plant in Bochum is one example of this kind. Opel itself is not able to solve all the problems of assembling seats or similar equipment as immediately as JC personnel is ready to. Opel has the opportunity to close an asset gap in the firm-specific assembly line - and in other areas, too.

Another reason of insourcing is a not satisfying amount of capacity utiii/ation at the customer's site. If machines, works or personnel are badly ulili/cd, supplici integration helps to turn idle capacity cost into used-capacity costs and to increase efiiciene\, as the example of TCH & Volkswagen illustrates.

Asset complementarity also comes to an edge if some highly speeiali/.ed insourcing partners come together. In case of MCC's industrial park the work is strictly subdivided into major areas of responsibility. Every insourcing partner, MCC included as system developer and administrator, is in the position of an "area owner" Within the special area of responsibility the system partner has accumulated a lot of expertise over time. Therefore, every system partner is integral part of the industrial park and not exchangeable immediately. The partners are closely tied together, and in this role they realize a substantial amount of commitment.

Summing up the examples of insourcing as resource pooling, it becomes evident that just the way the suppliers specialize their resources is basic for customer's decision to make use of spatial integration. If there are critical tasks of the customer to be performed where the own resource basis is not strong enough and if there are well- fitting partner firms, insourcing as a resource gap-closing arrangement becomes an interesting opportunity.

Whereas the general resource-based view is an adequate reference point in order to analyze insourcing in terms of asset pooling, the learning partnerships need a more focused theoretical background. The competence perspective appears to be appropriate because organizational learning can be used in order to foster competence building activities as major goal of these partnerships. Competence building can be defined according to Sanchez/Heene/Thomas (1996, p. 8) as "(...) any process by which a firm achieves qualitative changes in its existing stocks of assets and capabilities, including new abilities to coordinate and deploy new or existing assets and capabilities in ways that help the firm achieve its goals. Competence building creates, in effect, new options for future action for the firm in pursuing its goals"

By characterizing learning partnerships, the synergetic principle becomes a basic element. The cooperation, again, is based upon pooling different resources. However, one decisive difference is that especially competence building by interorganizational learning becomes the main underlying target of learning partnerships. That means that the principle of a more or less strict way of partitioning work, well-known from gap- closing insourcing arrangements, will be substituted by a close collaboration represented by mutual exchange of knowledge between the participating firms. The knowledge management is centered around the two basic tasks: accumulation and integration of knowledge, both closely intertwined.

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The insourcing partners try to share their specific knowledge relevant to the insourcing arrangement. Sharing knowledge between organizations can be understood as a basic supposition in order to develop distinctive competences in competition (Leonard-Barton 1995, Pierick/Beije 1996). Leonard-Barton (1995) points out that competence building- orientated activities of knowledge creation base upon (1) shared problem-solving, (2) implementing and integrating new technologies and methodologies, (3) constant formal and informal experimenting, and (4) pulling in expertise from outside. The case studies of the software industry clearly indicate that supplier's technological skills and capabilities need to be combined with customer know-how about managing internal processes. Only if such knowledge integration takes place, it is possible to make use of the various opportunities of IT systems.

With regard to knowledge accumulation, the insourcing partners together are able to absorb a greater body of knowledge than all for their own. In this context, the notion of "absorptive capacity", put forward by Cohen/Levinthal (1990), is useful in order to explain advantages of insourcing. Absorptive capacity means the "(...) ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends" (Cohen/Levinthal 1990, p. 128). Obviously, a spatial supplier integration is able to expand this capacity substantially, as the case studies reveal. Whereas the software firms try to exploit the enhanced absorptive capacity, MCC's industrial park could profit from this potential, especially if the corresponding firms make the decision to collaborate more closely with regard to special topics.

Both knowledge integration and knowledge accumulation help to acquire and create knowledge, one of competence's "raw materials" However, the question is still open how insourcing-related knowledge management is to be practiced in order to foster competence building. One important suggestion is made by Nonaka (1994), promoting four different kinds of knowledge conversion according to the epistemological and ontological dimension of knowledge: socialization, combination, externalization, and internalization. Indeed, there are certain requirements to be satisfied when distinctive competences should be developed. As Krogh/Roos (1992) point out, knowledge is only useful for competence management if it is on the one hand not bound to a single person and on the other hand not generalized in a way that almost everybody is able to get access to. Transforming knowledge in a way, that a limited group of persons shares it, seems to be the most promising way to foster competence building because competitors are confronted with serious problems by trying to acquire it. The organi/ational knowledge is group-specific and not depending on a single person who could be hired away. This makes acquisition almost impossible. Almost all the case study revealed that insourcing supports the creation of group-specific knowledge as usually only parts of supplier's and customer's personnel cooperate. Beside this ontological aspect, knowledge management has to put epistemological matters into consideration. Especially, knowledge should not be too explicit because explicitness makes imitation by competitors more likely. Therefore, some mechanisms of turning explicit knowledge into more or less tacit elements help to safeguard distinctive competences. The role of organizational routines (Nelson/Winter 1982) should not be under-estimated in the context of competence building.

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Furthermore, beside these facets of knowledge management the insourdng parirK-r> have to make use of the other isolating mechanisms actively when competence building should progress, such as:

Social complexity: Of course, it is usually impossible for competitors to get a complete impression about rival's resource endowment in use. Furthermore, in case of dyadic and especially network arrangements, it is even harder for competitors to analyze the underlying factors causing an organizational competence. The bundle of relevant resources to a competence becomes more and more inevidently. This helps to protect the status in distinctive competences in competition. Asset mass efficiencies: As mentioned above, every kind of insourcing as spatial supplier integration is based upon the pooling of resources. Such pooling usually arranges the compensation of critical gaps in resource endowment. After having closed a gap by insourcing, the coordination will be much more effective. The asset mass is growing and especially in learning partnerships the complementarity of pooled resources sometimes arranges critical mass effects. Supplier and customer personnel work together hand in hand and effect such a push. With regard to the IMP interaction approach (Turnbull/Valla 1986, p. 5), the atmosphere of the relationship significantly affects the extent to which such effects are achievable. Time compression diseconomies: By focusing asset development in a certain direction by the insourcing partners, it becomes more and more difficult for competitors to follow this organizational path. Imitation and substitution ol critical resources becomes unlikely, even if the follower is ready to make investments exceeding those of the insourcing alliance. First-mover advantages become striking.

The insights of a resource-based analysis on insourcing as spatial supplier integrationare to be summarized as follows:

By the help of the resource-based view in general and the competence-based perspective in detail it is possible to explain the development of partnership advantage helping to achieve a sustainable competitive advantage of the customer. If the customer has a competence to manage supplier networks (see Gemunden/Ritter 1998) in a goal-orientated way, he is able to enhance the potential of insourcing arrangements although there is no empirical evidence of network superiority. By arranging a network similar to the cited industrial park, the customer is able to establish a strategically coordinated "system solution" of closing asset gaps. If only an integration of one supplier takes place, such a "module approach" is more or less of the operational kind and has only limited influence on performance. Despite the risks of not perfect controllable know-how dissemination, the close and straightforward collaboration of insourcing partners in this study suggests that learning partnerships with the target of competence building seem to provide substantial benefits.

Insourcing and Recent Developments in Management

All in all, the two different approaches are quite useful in order to explain the opportunities and advantages of insourcing as spatial supplier integration. Therefore, it does not seem to be astonishing that a growing number of firms considers to make use of insourcing. Nevertheless, the question arises whether insourcing is in a certain way

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contradictory to several contemporary developments in strategic management in generaland interorganizational coordination in particular, as it promotes

centralization instead of decentralization,hierarchy-like coordination instead of the usual forms of "co-ordination by co operation" (Richardson 1972), and fixed agreements instead of loose forms of virtuality

Despite the fact that empirical evidence is still low, the answer seems to be that insourcing - as shown in the study - is mainly in tune with recent developments in management theory and practice. First, insourcing as spatial supplier integration is usually not a "stand-alone concept" at all. It is accompanied by other forms of coordination as many of the observed suppliers perform only parts of their task on the customer's site. Moreover, many of such preferred suppliers make use of special supplier networks by their own. By analyzing all the activities of the supplying network from the customer's point of view, it becomes clear that insourcing can only be a corrective of an over-emphasized decentralized coordination. However, it is a useful means in order to establish an appropriate balance between centralization and decentralization. Moreover, it stresses the importance of making strategic decisions concerning this critical topic of centralized versus decentralized buying (Woodside/Samuel 1981; Ford 1990; Matthyssens/Faes 1996).

Second, insourcing as spatial supplier integration is quite obviously a compromise between relational buying and hierarchical coordination. Therefore the term Vk de-facto vertical integration" seems to be well-fitting. However, insourcing is a special way of this de-facto vertical integration and in this role it represents quite often a new transaction design in industrial marketing and purchasing.

Third, insourcing demonstrates some limitations of virtual organizations. Obvious]). there are some aspects of coordination which cannot be managed "virtually" because i.e. close personal interaction is necessary. However, much of the vision of Miles and Snow came true. They stated:

"Thus, we expect the 21 st century firm to be a temporary organization, brought together by an entrepreneur with the aid of brokers and maintained by a network of contractual ties." (Miles/Snow 1984, p. 26-27)

Nevertheless, the examples from the automotive and software industry clearly indicate that even virtual coordination needs some support by durable arrangements. In this sense, insourcing maybe can represent something like a missing link. Understood in this sense, insourcing again is not contradicting contemporary developments in management.

All the arguments give rise to the impression that insourcing will be an emerging concept in purchasing and marketing management.

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Insourcing as Spatial Supplier Integration - Empirical