Supplier Certification and Quality Investment in Supply Chains

Abstract

Global sourcing has made quality management a more challenging task, and supplier certification has emerged as a solution to overcome suppliers' informational advantage about their product quality. This paper analyzes the impact of certification standards on the supplier's investment in quality when a buyer outsources the production process. Based on our results, deterministic certification may lead to under-investment in quality improvement technology for efficient suppliers, thereby leading to potential supply chain inefficiency. The introduction of noisy certification may alleviate this under-investment problem when the cost of information asymmetry is high. While allowing noisy certification always empowers the buyer to offer a menu to screen among heterogeneous suppliers, the buyer may optimally choose only a limited number of certification standards. Our analysis provides a clear-cut prediction of the types of certifiers the buyer should employ for heterogeneous suppliers, and we identify the conditions under which the supplier benefits from noisy certification.

Keywords: certification, quality investment, outsourcing, product recalls