Supplier Development in a Multi-Tier Supply Chain

40 Pages Posted: 24 Jan 2018 Last revised: 12 Jul 2019

See all articles by Ozgen Karaer

Ozgen Karaer

Middle East Technical University

Tim Kraft

North Carolina State University - Poole College of Management

Pınar Yalçın

Middle East Technical University (METU) - Industrial Engineering Department

Date Written: July 10, 2019

Abstract

We examine how a buyer can use a full-control strategy and cost sharing to develop the sustainable quality capabilities of his tier-1 and tier-2 suppliers. In particular, we consider how the buyer's development decisions and the suppliers' sustainable quality decisions are impacted by consumers' demand sensitivity to sustainable quality and the division of the supply chain margin. Two quality-demand models are studied -- the overall quality of the supply chain equals either (i) the sum of or (ii) the minimum between the suppliers' quality levels. We find that when the suppliers' sustainable quality levels are additive, even if the low-margin supplier has a positive net profit return from improved quality, she may still choose to free ride on the high-margin supplier's quality investment. Interestingly, the buyer can cause the free riding with his cost-sharing decisions. When instead, the overall sustainable quality is determined by the minimum between the suppliers' quality levels, the buyer's strategy is often to focus only on developing the low-margin supplier. Nevertheless, when the buyer's market gain from improved quality is large and the suppliers' gains are comparable to one another, the buyer can justify sharing costs with both suppliers and raising the overall sustainable quality of the supply chain to a level neither supplier can achieve without development support.

Keywords: Multi-Tier Supply Chain, Supplier Development, Supplier Quality, Game Theory

Suggested Citation

Karaer, Ozgen and Kraft, Tim and Yalçın, Pınar, Supplier Development in a Multi-Tier Supply Chain (July 10, 2019). Available at SSRN: https://ssrn.com/abstract=3103848 or http://dx.doi.org/10.2139/ssrn.3103848

Ozgen Karaer

Middle East Technical University ( email )

Ankara, 06531
Turkey

Tim Kraft (Contact Author)

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Pınar Yalçın

Middle East Technical University (METU) - Industrial Engineering Department ( email )

Dumlupınar Bulvarı No. 1
Ankara, Çankaya 06800
Turkey

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