The different effects of hardware and software on production interdependence in manufacturing

Abstract

Make or buy decisions are often decisions between investing in capital for production or building supply chain relationships upstream. These are strategic decisions about production interdependence: the degree to which materials and services are provided internally versus purchased externally. Information technology (IT) has increased productivity with hardware and software such as robotics and flexible manufacturing systems. IT has also improved information sharing and coordination along the supply chain by integrating business processes with software. Within manufacturing, we examine whether hardware and software are related to choices of make versus buy differently. From a transaction cost perspective this can be due to differential impacts on reducing internal production costs versus external coordination costs. We find that in U.S. manufacturing industries from 1998 to 2016, hardware favors internal production suggesting hardware reduces costs of internal provision more; software increased purchases from upstream suppliers suggesting software reduces costs of external provision more. This result shows that hardware and software complementarity has limits in that each has distinct productivity targets, and that empirically the decision of make versus buy is manifested by investments in these different types of IT capital. That is, when facing strategic decisions about make versus buy in manufacturing, hardware and software have opposite impacts.