A Dynamic Mechanism for Achieving Sustainable Quality Supply

44 Pages Posted: 5 Dec 2019

See all articles by Tracy Lewis

Tracy Lewis

Duke University

Fang Liu

Chinese Academy of Sciences

Jing-Sheng Jeannette Song

Duke University - Fuqua School of Business

Date Written: October 6, 2019

Abstract

We consider a supply network where a retailer sources from multiple economically weaker suppliers for a high-quality key material. The production of the material needs to comply with social and environmental standards over time. However, such compliance is costly, and the cost varies with privately observed dynamically changing environment (termed as the state), so the suppliers may cut corners, risking losing the ability to supply in the future. While retailer can invest to reduce the compliance cost, the investment outcome is uncertain. Therefore each party faces a trade-off between short-term gains/losses and long-term losses/gains. We present a dynamic model to capture these complexities and explore incentive mechanisms that enable all parties collaborate to achieve sustainable quality supply. We propose a sustainability index that reflects the supplier’s compliance status, and then construct a dynamic mechanism to achieve the first-best index in each period. The payments to the suppliers reflect both current and future states. This mechanism allows suppliers’ voluntary participation and induces truthful information exchange, self-enforcement, as well as first-best retailer investments. We show that the retailer commits and invests in a supplier only if the collaboration is longer than a certain contract length. Thus, we uncover situations where the support from the non-for-profit organizations is particularly valuable. Finally, we discuss additional strategies the retailer may adopt to scale up the program.

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

Suggested Citation

Lewis, Tracy and Liu, Fang and Song, Jing-Sheng Jeannette, A Dynamic Mechanism for Achieving Sustainable Quality Supply (October 6, 2019). 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)

Chinese Academy of Sciences ( email )

Zhongguancundonglu
55
Beijing, 100190
China
+8615311858853 (Phone)

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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