IDEAS home Printed from https://ideas.repec.org/a/bla/popmgt/v31y2022i1p304-317.html
   My bibliography  Save this article

Mitigating Product Quality Risk under External Financial Pressure: Inspection, Insurance, and Cash/Collateralized Loan

Author

Listed:
  • Jing Chen
  • Hang Wei
  • Lei Xie

Abstract

We consider a single‐period manufacturing problem wherein a risk‐neutral manufacturer procures product components from an upstream supplier. Component quality is uncertain. Dysfunctional components result in defective products associated with an external failure cost. There is external financing pressure related to financial stress. The manufacturer can use the internal cash‐flow and a collateralized loan to manage product quality risk through incoming inspection, business insurance, and cash hoard. We find that there is no cash hoard if a collateralized loan is used, and the cash hoard's value increases as external financing pressure decreases. Interestingly, more initial internal cash‐flow does not always lead to more investments in inspection and insurance. We also find that business insurance may improve a manufacturer's inspection effort. Finally, we reveal that, as the initial internal cash‐flow increases, inspection and insurance first substitute and then complement each other.

Suggested Citation

  • Jing Chen & Hang Wei & Lei Xie, 2022. "Mitigating Product Quality Risk under External Financial Pressure: Inspection, Insurance, and Cash/Collateralized Loan," Production and Operations Management, Production and Operations Management Society, vol. 31(1), pages 304-317, January.
    • Handle: RePEc:bla:popmgt:v:31:y:2022:i:1:p:304-317
    DOI: 10.1111/poms.13534
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/poms.13534
    Download Restriction: no
    File URL: https://libkey.io/10.1111/poms.13534?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    2. Mariya Bondareva & Edieal Pinker, 2019. "Dynamic Relational Contracts for Quality Enforcement in Supply Chains," Management Science, INFORMS, vol. 65(3), pages 1305-1321, March.
    3. Chen, Jingxian & Liang, Liang & Yang, Feng, 2015. "Cooperative quality investment in outsourcing," International Journal of Production Economics, Elsevier, vol. 162(C), pages 174-191.
    4. Jiri Chod & Nils Rudi & Jan A. Van Mieghem, 2010. "Operational Flexibility and Financial Hedging: Complements or Substitutes?," Management Science, INFORMS, vol. 56(6), pages 1030-1045, June.
    5. Reyniers, Diane J. & Tapiero, Charles S., 1995. "Contract design and the control of quality in a conflictual environment," European Journal of Operational Research, Elsevier, vol. 82(2), pages 373-382, April.
    6. Diane J. Reyniers & Charles S. Tapiero, 1995. "The Delivery and Control of Quality in Supplier-Producer Contracts," Management Science, INFORMS, vol. 41(10), pages 1581-1589, October.
    7. Volodymyr Babich & Christopher S. Tang, 2012. "Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 301-314, April.
    8. Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2000. "Information, Contracting, and Quality Costs," Management Science, INFORMS, vol. 46(6), pages 776-789, June.
    9. Hsiao†Hui Lee & Cuihong Li, 2018. "Supplier Quality Management: Investment, Inspection, and Incentives," Production and Operations Management, Production and Operations Management Society, vol. 27(2), pages 304-322, February.
    10. Gary H. Chao & Seyed M. R. Iravani & R. Canan Savaskan, 2009. "Quality Improvement Incentives and Product Recall Cost Sharing Contracts," Management Science, INFORMS, vol. 55(7), pages 1122-1138, July.
    11. Long He & Ying Rong & Zuo‐Jun Max Shen, 2020. "Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks," Production and Operations Management, Production and Operations Management Society, vol. 29(1), pages 9-23, January.
    12. Huaxia Rui & Guoming Lai, 2015. "Sourcing with Deferred Payment and Inspection under Supplier Product Adulteration Risk," Production and Operations Management, Production and Operations Management Society, vol. 24(6), pages 934-946, June.
    13. Qing Ding & Lingxiu Dong & Panos Kouvelis, 2007. "On the Integration of Production and Financial Hedging Decisions in Global Markets," Operations Research, INFORMS, vol. 55(3), pages 470-489, June.
    14. Iny Hwang & Suresh Radhakrishnan & Lixin (Nancy) Su, 2006. "Vendor Certification and Appraisal: Implications for Supplier Quality," Management Science, INFORMS, vol. 52(10), pages 1472-1482, October.
    15. Finbarr Murphy & Fabian Pütz & Martin Mullins & Torsten Rohlfs & Dennis Wrana & Michael Biermann, 2019. "The impact of autonomous vehicle technologies on product recall risk," International Journal of Production Research, Taylor & Francis Journals, vol. 57(20), pages 6264-6277, October.
    16. Lingxiu Dong & Brian Tomlin, 2012. "Managing Disruption Risk: The Interplay Between Operations and Insurance," Management Science, INFORMS, vol. 58(10), pages 1898-1915, October.
    17. Corey Billington & Blake Johnson & Alex Triantis, 2002. "A Real Options Perspective On Supply Chain Management In High Technology1," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(2), pages 32-43, December.
    18. Mohammad E. Nikoofal & Mehmet Gümüş, 2018. "Quality at the Source or at the End? Managing Supplier Quality Under Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 498-516, July.
    19. Kashi R. Balachandran & Suresh Radhakrishnan, 2005. "Quality Implications of Warranties in a Supply Chain," Management Science, INFORMS, vol. 51(8), pages 1266-1277, August.
    20. Kim, Kyoung-Kuk & Park, Kun Soo, 2014. "Transferring and sharing exchange-rate risk in a risk-averse supply chain of a multinational firm," European Journal of Operational Research, Elsevier, vol. 237(2), pages 634-648.
    21. S. Alex Yang & Nitin Bakshi & Christopher J. Chen, 2021. "Trade Credit Insurance: Operational Value and Contract Choice," Management Science, INFORMS, vol. 67(2), pages 875-891, February.
    22. Lingxiu Dong & Sammi Yu Tang & Brian Tomlin, 2018. "Production Chain Disruptions: Inventory, Preparedness, and Insurance," Production and Operations Management, Production and Operations Management Society, vol. 27(7), pages 1251-1270, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wu, Qianni & Chiu, Chun-Hung, 2023. "The impacts of carbon insurance on supply chain and environment considering technology risk under cap-and-trade mechanism," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 180(C).
    2. Bhavesh Kumar & Love Kumar & Avinash Kumar & Ramna Kumari & Uroosa Tagar & Claudio Sassanelli, 2024. "Green finance in circular economy: a literature review," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(7), pages 16419-16459, July.
    3. Murat Erkoc & Haresh Gurnani & Saibal Ray & Mingzhu Jin, 2023. "Quality investment, inspection policy, and pricing decisions in a decentralized supply chain," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 207-226, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Jing & Wei, Hang & Xu, Shujun & Zheng, Chaonan, 2023. "The value of product recall insurance in a price competition with financially constrained suppliers," European Journal of Operational Research, Elsevier, vol. 307(3), pages 1161-1176.
    2. Murat Erkoc & Haresh Gurnani & Saibal Ray & Mingzhu Jin, 2023. "Quality investment, inspection policy, and pricing decisions in a decentralized supply chain," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 207-226, January.
    3. Li Chen & Hau L. Lee, 2017. "Sourcing Under Supplier Responsibility Risk: The Effects of Certification, Audit, and Contingency Payment," Management Science, INFORMS, vol. 63(9), pages 2795-2812, September.
    4. Dionisia Tzavara and Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," EUI-RSCAS Working Papers 16, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    5. Dai, Bin & Nu, Yu & Xie, Xia & Li, Jianbin, 2021. "Interactions of traceability and reliability optimization in a competitive supply chain with product recall," European Journal of Operational Research, Elsevier, vol. 290(1), pages 116-131.
    6. Nikoofal, Mohammad E. & Gümüş, Mehmet, 2020. "Value of audit for supply chains with hidden action and information," European Journal of Operational Research, Elsevier, vol. 285(3), pages 902-915.
    7. Yang Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2013. "Quality Assurance Contracts in a Multi-Level Supply Chain," Working Papers 0206mss, College of Business, University of Texas at San Antonio.
    8. Shalpegin, Timofey, 2020. "Collaborative product development: Managing supplier incentives for key component testing," European Journal of Operational Research, Elsevier, vol. 285(2), pages 553-565.
    9. Dionisia Tzavara & Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," RSCAS Working Papers 2011/16, European University Institute.
    10. Mohammad E. Nikoofal & Mehmet Gümüş, 2018. "Quality at the Source or at the End? Managing Supplier Quality Under Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 498-516, July.
    11. Yan Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2016. "Quality Management in Multi-Level Supply Chains with Outsourced Manufacturing," Production and Operations Management, Production and Operations Management Society, vol. 25(2), pages 290-305, February.
    12. DeYong, Gregory D. & Pun, Hubert, 2015. "Is dishonesty the best policy? Supplier behaviour in a multi-tier supply chain," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 1-13.
    13. Tzavara Dionisia & Heritier Adrienne, 2012. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," Business and Politics, De Gruyter, vol. 14(2), pages 1-24, August.
    14. Zhang, Manman & Zhang, Juliang & Sun, Yue & Cheng, T.C.E., 2022. "How to outsource production considering quality management: Turnkey or buy-sell?," Omega, Elsevier, vol. 113(C).
    15. Mariya Bondareva & Edieal Pinker, 2019. "Dynamic Relational Contracts for Quality Enforcement in Supply Chains," Management Science, INFORMS, vol. 65(3), pages 1305-1321, March.
    16. Yoo, Seung Ho & Cheong, Taesu, 2018. "Quality improvement incentive strategies in a supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 114(C), pages 331-342.
    17. Aadhaar Chaturvedi, 2021. "Excessive Competition and Supplier Non‐Performance Risk: Trade‐offs in Reverse Auctions," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 3073-3093, September.
    18. Xin Fang & Soo-Haeng Cho, 2020. "Cooperative Approaches to Managing Social Responsibility in a Market with Externalities," Manufacturing & Service Operations Management, INFORMS, vol. 22(6), pages 1215-1233, November.
    19. Ying‐Ju Chen & Mingcherng Deng, 2013. "Supplier certification and quality investment in supply chains," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(3), pages 175-189, April.
    20. Andrew M. Davis & Kyle Hyndman, 2018. "An Experimental Investigation of Managing Quality Through Monetary and Relational Incentives," Management Science, INFORMS, vol. 64(5), pages 2345-2365, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:popmgt:v:31:y:2022:i:1:p:304-317. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1937-5956 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.