Financial Incentives to Avoid Major Quality Problems in a Supply Chain

12 Pages Posted: 27 Oct 2018

See all articles by Susan A. Slotnick

Susan A. Slotnick

Department of Operations and Supply Chain Management, Cleveland State University

Matthew J. Sobel

Case Western Reserve University; Weatherhead School of Management, Case Western Reserve University

Date Written: September 22, 2018

Abstract

Manufacturers who outsource components incur risks as well as benefits. If the supplied product has a major quality defect, the adverse effect on the manufacturer's reputation reduces its market share. This paper presents a discrete-time model of a buyer who collaborates with a sole supplier to avoid quality problems by paying a higher per-unit purchase price to the supplier and/or paying the supplier a lump sum contingent on the absence of a major quality defect. Analytical results include an optimal risk-posture policy for which the buyer should use only one of these financial incentives or the other, and computational results provide insights about the relationship of that optimal policy to various parameters.

Keywords: Quality, supply chain, incentives, reputation

JEL Classification: L14, L15

Suggested Citation

Slotnick, Susan A. and Sobel, Matthew J. and Sobel, Matthew J., Financial Incentives to Avoid Major Quality Problems in a Supply Chain (September 22, 2018). Available at SSRN: https://ssrn.com/abstract=3260192 or http://dx.doi.org/10.2139/ssrn.3260192

Susan A. Slotnick

Department of Operations and Supply Chain Management, Cleveland State University ( email )

1860 E 18th Street, BU 542
Cleveland, OH 44115
United States

Matthew J. Sobel (Contact Author)

Weatherhead School of Management, Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

HOME PAGE: http://https://weatherhead.case.edu/faculty/emeriti-faculty/matthew-sobel

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