A Dynamic Mechanism for Achieving Sustainable Quality Supply

41 Pages Posted: 5 Dec 2019 Last revised: 31 May 2023

See all articles by Tracy Lewis

Tracy Lewis

Duke University

Fang Liu

Durham University Business School

Jing-Sheng Jeannette Song

Duke University - Fuqua School of Business

Date Written: September 25, 2024

Abstract

We model a supply chain where a retailer relies on an economically weaker supplier to supply a high-quality key material. For sustainable supply, the production process must comply with socially and environmentally responsible standards over time. However, compliance costs fluctuate due to an underlying state that is privately observed by the supplier, who may thus fail to comply, risking future supply capabilities. While the retailer can invest in reducing the cost, the outcome remains uncertain. To address these challenges, we introduce a sustainability index to monitor and manage the supplier's compliance within a multi-period, index-based agreement to optimize the supply chain's overall sustainability.  The proposed mechanism modifies the sustainability index and corresponding payment terms for each party in each period, ensuring it reflects current circumstances and the worst-case scenarios, and anticipates future changes. This structure promotes voluntary participation, truthful information sharing, nonnegative payment to the supplier, and the first-best investment. Through two examples within our general framework, we illustrate the payment term dynamics and the importance of continuous investment. The examples also highlight how contract length, investment success probability, and the nature of investments are critical for the success of sustainability programs, pinpointing when external support from non-profit organizations is most effective.

Keywords: supply chain coordination, mechanism design, sustainable supply, investments

Suggested Citation

Lewis, Tracy and Liu, Fang and Song, Jing-Sheng Jeannette, A Dynamic Mechanism for Achieving Sustainable Quality Supply (September 25, 2024). Available at SSRN: https://ssrn.com/abstract=2513103 or http://dx.doi.org/10.2139/ssrn.2513103

Tracy Lewis

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Fang Liu (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Jing-Sheng Jeannette Song

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Duke University
Durham, NC 27708
United States

HOME PAGE: http://people.duke.edu/~jssong/

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