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Incentive Mechanism for Sustainable Improvement in a Supply Chain

Author

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  • EuiBeom Jeong

    (Korea University Business School, Seoul 02841, Korea)

  • GeunWan Park

    (Institute of Knowledge Service, Hanyang University ERICA, Ansan 15588, Korea)

  • Seung Ho Yoo

    (Division of Interdisciplinary Industrial Studies, Hanyang University, Seoul 04763, Korea)

Abstract

In this study, we consider the issue of sustainable development in the supply chain consisting of an original equipment manufacturer (OEM) and a contract manufacturer (CM). We investigate how to facilitate the CM’s investment in the environmental quality of a product so as to properly respond to climate change. We introduce a quantity incentive contract, and obtain the optimal solution based on a Stackelberg game. The OEM, as the focal company, determines the level of the incentive, and the CM, responsible for product design and production, determines its level of environmental quality given the OEM’s incentive offer. To investigate the effectiveness of the quantity incentive contract and provide important implications, we analytically compare the quantity incentive contract with the basic wholesale price contract without any incentives and conduct numerical experiments. Our results reveal that the quantity incentive contract facilitates the CM’s investment in environmental quality, and enhances the environmental, market, and profit performance of not only the CM but also the OEM which pays the incentive. We also show that the quantity incentive contract is suitable to develop a long-term relationship between the OEM and the CM.

Suggested Citation

  • EuiBeom Jeong & GeunWan Park & Seung Ho Yoo, 2019. "Incentive Mechanism for Sustainable Improvement in a Supply Chain," Sustainability, MDPI, vol. 11(13), pages 1-18, June.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:13:p:3508-:d:243127
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    References listed on IDEAS

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    Cited by:

    1. Congli Su & Mingxi Wang, 2022. "Quality incentive contract design in government procurement for innovation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3665-3684, December.

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