Advanced Search
MyIDEAS: Login to save this article or follow this journal

Quality Implications of Warranties in a Supply Chain

Contents:

Author Info

  • Kashi R. Balachandran

    ()
    (Leonard N. Stern School of Business, New York University, New York, New York 10012)

  • Suresh Radhakrishnan

    ()
    (School of Management, University of Texas at Dallas, Richardson, Texas 75083-0688)

Registered author(s):

    Abstract

    We examine a supply chain in which the final product consists of components made by a buyer and a supplier. In the single moral-hazard case, the buyer's quality is observable, whereas in the double moral-hazard case, the buyer's quality is not observable. The supplier's quality is not observable in both the single and double moral-hazard cases. In each case, we examine a warranty/penalty contract between the buyer and the supplier based on information from incoming inspection and external failures. When the warranty contract is based on information from external failures in the single moral-hazard case, the first-best quality is achieved, whereas in the double moral-hazard case, the first-best quality is achieved if the supplier is not held responsible for the buyer's defects. When the warranty contract is based on information from incoming inspection, the first-best is achieved in both the single and double moral-hazard cases, even when the incoming inspection does not identify all of the supplier's defectives. An analysis of whether the penalty on the supplier in each case meets a fairness criterion---that is, the penalty does not exceed the manufacturer's external failure cost---indicates that the fairness criterion is met by the warranty contract based on information from incoming inspection when the first-best incoming inspection is sufficiently high. However, if the first-best incoming inspection is low and the precision of pinpointing the supplier's responsibility for external failure is sufficiently high, the warranty contract based on external failures could satisfy the fairness criterion.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mnsc.1050.0408
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 51 (2005)
    Issue (Month): 8 (August)
    Pages: 1266-1277

    as in new window
    Handle: RePEc:inm:ormnsc:v:51:y:2005:i:8:p:1266-1277

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: incentives; supply chain; moral hazard; warranty; fairness criterion; legal constraint; quality management;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Aust, Gerhard & Bräuer, Ina & Buscher, Udo, 2014. "A note on “Quality investment and inspection policy in a supplier-manufacturer supply chain”," European Journal of Operational Research, Elsevier, vol. 234(3), pages 910-915.
    2. Yim, Andrew, 2010. "Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing," MPRA Paper 27858, University Library of Munich, Germany.
    3. Pun, Hubert & Sebastian Heese, H., 2014. "Outsourcing to suppliers with unknown capabilities," European Journal of Operational Research, Elsevier, vol. 234(1), pages 108-118.
    4. Liu, Wei-hua & Xie, Dong & Xu, Xue-cai, 2013. "Quality supervision and coordination of logistic service supply chain under multi-period conditions," International Journal of Production Economics, Elsevier, vol. 142(2), pages 353-361.
    5. Kurata, Hisashi & Nam, Seong-Hyun, 2013. "After-sales service competition in a supply chain: Does uncertainty affect the conflict between profit maximization and customer satisfaction?," International Journal of Production Economics, Elsevier, vol. 144(1), pages 268-280.
    6. Lee, Chang Hwan & Rhee, Byong-Duk & Cheng, T.C.E., 2013. "Quality uncertainty and quality-compensation contract for supply chain coordination," European Journal of Operational Research, Elsevier, vol. 228(3), pages 582-591.
    7. Dionisia Tzavara and Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," EUI-RSCAS Working Papers 16, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    8. Dionisia Tzavara & Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," RSCAS Working Papers 2011/16, European University Institute.
    9. Kleyner, Andre & Sandborn, Peter, 2008. "Minimizing life cycle cost by managing product reliability via validation plan and warranty return cost," International Journal of Production Economics, Elsevier, vol. 112(2), pages 796-807, April.
    10. Kurata, Hisashi & Nam, Seong-Hyun, 2010. "After-sales service competition in a supply chain: Optimization of customer satisfaction level or profit or both?," International Journal of Production Economics, Elsevier, vol. 127(1), pages 136-146, September.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:51:y:2005:i:8:p:1266-1277. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.