Penalties, Rewards, and Inspection: Provision for Quality in Supply Chain Contracts

Journal of the Operational Research Society, Vol. 52, No. 1, pp. 109-115, 2001

Posted: 12 Jun 2006

See all articles by S. Andrew Starbird

S. Andrew Starbird

Santa Clara University - Department of Information Systems & Analytics

Abstract

Rewards for better quality, penalties for poorer quality, and the type of inspection policy are among the most common quality-related provisions of supply chain contracts. In this paper, we examine the effect of rewards, penalities, and inspection policies on the behaviour of an expected cost minimizing supplier. We assume that the supplier selects a batch size and target quality level in order to meet a buyer's deterministic demand. We show that the reward and/or penalty that motivates a supplier to deliver the buyer's target quality depends upon the inspection policy. We also show that, when sampling inspection is used, penalties and rewards are substitutes for one another in motivating the supplier and that there exists a unique reward/penalty combination at which the buyer's expected cost of quality is zero.

Keywords: quality, contracts, inspection policy, supply chain management

JEL Classification: L15, M11, L14,

Suggested Citation

Starbird, Sterling Andrew, Penalties, Rewards, and Inspection: Provision for Quality in Supply Chain Contracts. Journal of the Operational Research Society, Vol. 52, No. 1, pp. 109-115, 2001, Available at SSRN: https://ssrn.com/abstract=907383

Sterling Andrew Starbird (Contact Author)

Santa Clara University - Department of Information Systems & Analytics ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

HOME PAGE: http://omis.scu.edu/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
922
PlumX Metrics