Low cost not enough anymore: A sourcing paradox

In a mature consumer market, the price and quality of a certain product are not the only considerations for a successful purchase. The social image of a company plays, as well, a more and more important role in developing or maintaining the competitive edge. In response to this call for social responsibility, companies should reconsider their sourcing decisions. This paper studies the pricing and sourcing choices in a two-echelon supply chain selling a procure-to-stock product to a price-sensitive and social welfare conscious market. We assume that the manufacturer can decide between two different sourcing options, i.e., insourcing and outsourcing, without friction costs. The demand is uncertain in the way that consumers purchase with the consideration of social image, along with others, but the perception of the social image is heterogeneous. We illustrate the significance of the social image in a company's sourcing decision. Our results explain, from a managerial point of view, whether or why, if applicable, low manpower cost countries are losing their competitive advantages.