Managing Quality in a Heterogeneous Contract Manufacturing Environment

The outsourcing of production is a prominent strategy across industries. While the strategy can have many benefits, the popular press reports numerous examples of quality issues originating with contract manufacturers (CMs). Observing these quality issues, multiple scholars call for the quality management (QM) literature to be extended to explicitly address the challenges of managing quality in an inter‐organizational context. Additionally, QM researchers recognize the need to consider contextual contingencies for the effectiveness of specific QM practices. Responding to these calls, we focus on the potential contingent factor of CM heterogeneity (i.e. the degree of product and process diversity at the CM plant). We first test the direct relationship between CM manufacturing heterogeneity and CM quality conformance performance, as reported by the CM's customers, brand‐owning firms. Next, we evaluate the effectiveness of multiple practices that these brand‐owning firms can employ to mitigate the anticipated negative effect of heterogeneity on their CM's conformance quality. We utilize paired dyadic data on 106 contract manufacturing relationships in the food, drug, and medical device industries to test our hypothesized model. The results of our analysis reveal a negative association between heterogeneity at CM facilities and their conformance quality performance. Our results also identify cooperative relationships, contractual coordination provisions, and formal performance assessment programs as practices that brand‐owning firms can employ to largely eliminate the negative impact of heterogeneity on CMs’ conformance quality performance.