Supplier Quality Management: Investment, Inspection, and Incentives

Forthcoming in Production and Operations Management

40 Pages Posted: 20 Dec 2012 Last revised: 28 Sep 2017

See all articles by Hsiao-Hui Lee

Hsiao-Hui Lee

National Chengchi University (NCCU) - Department of Management Information Systems

Cuihong Li

University of Connecticut - Department of Operations & Information Management

Date Written: September 1, 2017

Abstract

Buyers can manage product quality sourced from suppliers in three ways: they can improve the quality incoming from suppliers directly by investing in suppliers to improve a process/product, they can improve the incoming quality indirectly by incentivizing supplier quality-improvement efforts, and/or they can control the quality outgoing to subsequent processes by inspecting incoming units. In this paper, we study a buyer's use of these three instruments|investment, incentives, and inspection to manage the sourced quality. To do so, we consider a general relationship between the buyer's direct investment effort and supplier's quality-improvement effort, allowing them to be complementary, substitutable, or additive in their quality-improvement effects. For situations in which the buyer and the supplier decide their efforts simultaneously with contractible internal-failure events, we identify three types of strategies: the investment-based strategy (focusing on the buyer's investment effort) for strongly substitutable efforts, the inspection-based strategy (focusing on inspection) for strongly complementary efforts, and the integrative strategy (emphasizing all three instruments) for additive efforts. If buyer-investment commitment is possible, then the inspection-based strategy in which both parties defect in their efforts will be replaced by a collaboration-based strategy in which both parties exert high efforts to improve quality. Contracting upon external failures (in addition to internal failures) does not change this strategy pattern; however, when combined with buyer-effort commitment, such a contract achieves the first-best result.

Keywords: Quality, Incentives, Inspection, Buyer Direct Investment, Supplier Management

Suggested Citation

Lee, Hsiao-Hui and Li, Cuihong, Supplier Quality Management: Investment, Inspection, and Incentives (September 1, 2017). Forthcoming in Production and Operations Management. Available at SSRN: https://ssrn.com/abstract=2191754 or http://dx.doi.org/10.2139/ssrn.2191754

Hsiao-Hui Lee

National Chengchi University (NCCU) - Department of Management Information Systems ( email )

No. 64, Section 2, Zhǐnán Rd
Wenshan District
Taipei City
Taiwan

Cuihong Li (Contact Author)

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

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