Values of Traceability in Supply Chains

64 Pages Posted: 16 Dec 2018 Last revised: 17 Jul 2020

See all articles by Yao Cui

Yao Cui

Cornell University - Samuel Curtis Johnson Graduate School of Management

Ming Hu

University of Toronto - Rotman School of Management

Jingchen Liu

Nanjing University - School of Business

Date Written: August 1, 2019

Abstract

Problem definition: We study how traceability can impact quality contracting under different supply chain structures. Academic/practical relevance: The recent development in blockchain technologies has enabled end-to-end traceability of supply chains. When a product failure occurs, such traceability information can be used to identify the suppliers at fault. Methodology: We use game theory to study the contracting equilibrium between one buyer and two suppliers. Results: In serial supply chains where each supplier belongs to a different tier of the supply chain, the sequential production process leads to a double moral hazard problem between the upstream and downstream suppliers, so that the upstream supplier is less incentivized and product quality is reduced. In this case, the ability to trace the production process improves efficiency by mitigating the double moral hazard. As a result, in serial supply chains, traceability always improves product quality and all firms' profits and naturally creates a win-win situation. In parallel supply chains where all suppliers belong to the same tier of the supply chain, the buyer may have to recall all products from the market once a defect occurs if he cannot trace which products were produced by the defective and non-defective suppliers. In this case, in addition to the improved efficiency due to the mitigated moral hazard, the ability to trace the product origin also impacts the supply chain by enabling flexibility in product recall, which can in fact reduce product quality. Furthermore, in parallel supply chains, while traceability always improves the buyer's profit and the total supply chain profit, it can reduce the suppliers' profits. Managerial implications: The impact of traceability critically depends on the supply chain structure. Blockchain-enabled traceability may be easier to gain traction in ``long" multi-tier supply chains as opposed to ``flat" multi-sourcing supply chains.

Keywords: Blockchain, traceability, supply chain management, quality management, contracting

JEL Classification: C72, D21, D86, O31

Suggested Citation

Cui, Yao and Hu, Ming and Liu, Jingchen, Values of Traceability in Supply Chains (August 1, 2019). Available at SSRN: https://ssrn.com/abstract=3291661 or http://dx.doi.org/10.2139/ssrn.3291661

Yao Cui

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Jingchen Liu (Contact Author)

Nanjing University - School of Business ( email )

22 Hankou Road
Nanjing, Jiangsu 210093
China

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