Abandon or Retain the Supplier? Sourcing Policy Choice Under Independent R&D Uncertainty

To enhance competitiveness and curb sourcing costs, many manufacturers now turn to investments in independent R&D of core components (e.g., chips for smartphones or batteries for electrical vehicles). However, R&D is expensive, lengthy and inherently uncertain. Knowing that R&D success is not guaranteed, should manufacturers abandon the supplier and turn to in-house production (the Abandon policy) or maintain the supplier as a complementary source (the Retain policy)? We model this situation as a two-stage game, derive equilibrium solutions under both policies, and identify the manufacturer's optimal strategy under convex production costs. Our results reveal interesting managerial insights. The Retain policy always provides sourcing cost relief to the manufacturer, a benefit absent under the Abandon policy. An increase in the manufacturer's technology level can always benefit the manufacturer under the Abandon policy, which is not the case under the Retain policy. A counter-intuitive finding is that an increase in supplier's cost may possibly benefit all supply chain members under the Retain policy. Furthermore, we provide guidance on policy choices that the manufacturer with a sufficiently high level of technology should adopt the Abandon policy. Conversely, the manufacturer with a low level of technology should adopt the Retain Policy. Finally, we find that the timing of supplier pricing and linear in-house production costs do not affect the main conclusions, but the manufacturer consistently prefers the Abandon policy under concave costs.