Quality Improvement Incentives and Product Recall Cost Sharing Contracts
As companies outsource more product design and manufacturing activities to other members of the supply chain, improving end-product quality has become an endeavor extending beyond the boundaries of the firms' in-house process capabilities. In this paper, we discuss two contractual agreements by which product recall costs can be shared between a manufacturer and a supplier to induce quality improvement effort. More specifically, we consider (i) cost sharing based on selective root cause analysis (Contract S), and (ii) partial cost sharing based on complete root cause analysis (Contract P). Using insights from supermodular game theory, for each contractual agreement, we characterize the levels of effort the manufacturer and the supplier would exert in equilibrium to improve their component failure rate when their effort choices are subject to moral hazard. We show that both Contract S and Contract P can achieve the first best effort levels; however, Contract S results in higher profits for the manufacturer and the supply chain. For the case in which the information about the quality of the supplier's product is not revealed to the manufacturer (i.e., the case of information asymmetry), we develop a menu of contracts that can be used to mitigate the impact of information asymmetry. We show that the menu of contracts not only significantly decreases the manufacturer's cost due to information asymmetry, but also improves product quality.
Volume (Year): 55 (2009)
Issue (Month): 7 (July)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nicholas G. Rupp, 2004. "The Attributes of a Costly Recall: Evidence from the Automotive Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 25(1), pages 21-44, 08.
- Diane J. Reyniers & Charles S. Tapiero, 1995. "The Delivery and Control of Quality in Supplier-Producer Contracts," Management Science, INFORMS, vol. 41(10), pages 1581-1589, October.
- Charles J. Corbett & Gregory A. DeCroix, 2001. "Shared-Savings Contracts for Indirect Materials in Supply Chains: Channel Profits and Environmental Impacts," Management Science, INFORMS, vol. 47(7), pages 881-893, July.
- Rupp, Nicholas G & Taylor, Curtis R, 2002. "Who Initiates Recalls and Who Cares? Evidence from the Automobile Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 123-149, June.
- Kashi R. Balachandran & Suresh Radhakrishnan, 2005. "Quality Implications of Warranties in a Supply Chain," Management Science, INFORMS, vol. 51(8), pages 1266-1277, August.
- Jarrell, Gregg & Peltzman, Sam, 1985.
"The Impact of Product Recalls on the Wealth of Sellers,"
Journal of Political Economy,
University of Chicago Press, vol. 93(3), pages 512-536, June.
- Gregg A. Jarrell & Sam Peltzman, 1984. "The Impact of Product Recalls on the Wealth of Sellers," University of Chicago - George G. Stigler Center for Study of Economy and State 33, Chicago - Center for Study of Economy and State.
- Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2000. "Information, Contracting, and Quality Costs," Management Science, INFORMS, vol. 46(6), pages 776-789, June.
- Wei Shi Lim, 2001. "Producer-Supplier Contracts with Incomplete Information," Management Science, INFORMS, vol. 47(5), pages 709-715, May.
- Kaijie Zhu & Rachel Q. Zhang & Fugee Tsung, 2007. "Pushing Quality Improvement Along Supply Chains," Management Science, INFORMS, vol. 53(3), pages 421-436, March.
- Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2001. "Performance Measurement and Design in Supply Chains," Management Science, INFORMS, vol. 47(1), pages 173-188, January. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:55:y:2009:i:7:p:1122-1138. 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.