Production, Manufacturing and Logistics Impacts of supplier knowledge sharing competences and production capacities on radical innovative product sourcing Shao Wei Lester Eng a,⇑ , Ek Peng Chew b , Loo Hay Lee b a The Logistics Institute – Asia Pacific, National University of Singapore, 21 Heng Mui Keng Terrace, 04-01, Singapore 119613, Singapore b Department of Industrial and Systems Engineering, National University of Singapore, 1 Engineering Drive 2, Singapore 117576, Singapore article info Article history: Received 2 April 2012 Accepted 20 June 2013 Available online xxxx Keywords: Nonlinear programming Radical innovation Product sourcing Knowledge sharing Particle swarm optimization abstract An effective sourcing strategy leads to cost savings and value added collaborations. For radical innovative product sourcing (RIPS), the exact nature and demand of products are highly uncertain. As such, knowl- edge sharing competences and production capacities of potential suppliers are prerequisite capabilities. The main aim is to investigate the impacts of these considerations on sourcing strategies through the development of two optimization models. Under the assumptions of single product sourcing, single per- iod time window, uncertain demand and stochastic supply, KKT conditions are used to solve a simplified nonlinear optimization model analytically. The model is then expanded and particle swarm optimization is used to solve numerically the number of suppliers, order quantities and the level of relationship invest- ments that maximize the value of sourcing. Through extensive scenario and sensitivity analyses, we pro- vide some key insights. Ó 2013 Elsevier B.V. All rights reserved. 1. Introduction Radical innovation product sourcing (RIPS), the practice in which firms outsource manufacturing of radical innovative prod- ucts to third party suppliers, has proliferated in recent years. With the growing importance of RIPS, it is important for firms to deter- mine and adopt the most profitable sourcing strategy. This paper adopts a supplier management optimization approach to address this issue. We first review the theoretical underpinnings of RIPS’ rise in importance. This will be followed by a review of the advan- tages and disadvantages of reducing the size of supplier base. Lastly, relevant supplier management models would be discussed. The proliferation of RIPS can be explained using the three views of the firm namely ‘‘Resource-based’’, ‘‘Knowledge-based’’, and ‘‘Relational’’. The resource-based view states that a firm’s compet- itive advantage depends on how well it utilizes the resources that it has at its disposal (Penrose, 1959; Rumelt, 1984; Wernerfelt, 1984). Key resources should be valuable, rare, in-imitable and non-substitutable. The knowledge-based view further claims that knowledge, being an in-imitable resource that is generated from complex social and cultural firm structures, is the most strategi- cally important resource of the firm (Conner, 1991; Conner & Prah- alad, 1996; Demsetz, 1988; Grant, 1996; Kogut & Zander, 1992; Madhok, 1996; Nahapiet & Ghoshal, 1998). The relational view on the other hand argues that idiosyncratic inter-firm interactions are sources of relational rents which are defined as ‘‘supernormal profits jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners’’ (Dyer & Singh, 1998). Knowledge sharing is identified as one of the main generators of this relational rent. Both the resource-based and knowledge-based views provide understanding into the behavior of innovative firms as they focus on developing and utilizing their knowledge-based resources to develop innovative products. In so doing, some firms will lack the necessary manufacturing capabilities. The relational view then explains the proliferation of inter-firm collaborations between the innovative firm and third party manufacturers and suppliers (RIPS). For RIPS to be successful, effective knowledge sharing, where there is transparent communication of information and continuous sharing of explicit and tacit knowledge between the buying firm and the supplier, is necessary to enhance product reliability and conformance to product specifications (Nooteboom, 1999; Song, Berends, Van der Bij, & Weggeman, 2007). This is again in line with both the knowledge-based and relational views of the firm. Effective and unequivocal knowledge sharing requires firstly, suppliers to be competent in knowledge sharing practices; secondly, the establishment of a high level of trust between the buying firm and the suppliers; and lastly, a high absorptive capacity of suppliers to assimilate knowledge and information to produce high quality products (Song et al., 2007). In addition, the 0377-2217/$ - see front matter Ó 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.ejor.2013.06.031 ⇑ Corresponding author. Tel.: +65 94762287; fax: +65 67771434. E-mail addresses: tlieswl@nus.edu.sg (S.W.L. Eng), isecep@nus.edu.sg (E.P. Chew), iseleelh@nus.edu.sg (L.H. Lee). European Journal of Operational Research xxx (2013) xxx–xxx Contents lists available at SciVerse ScienceDirect European Journal of Operational Research journal homepage: www.elsevier.com/locate/ejor Please cite this article in press as: Eng, S. W. L., et al. Impacts of supplier knowledge sharing competences and production capacities on radical innovative product sourcing. European Journal of Operational Research (2013), http://dx.doi.org/10.1016/j.ejor.2013.06.031