Risk analysis on product quality improvement and supply chain performance for return contract with warranty

Products which require after sales services and associated with a warranty clause often pass through a series of quality checks and quality control measures. Improvement of quality of the product is an ongoing exercise and the manufacturer and the channel coordinator are expected to explore the impact of any initiative for quality improvement on the profitability and performance of the supply chain. It is important to carry out a risk benefit analysis before undertaking such quality improvement initiatives since it requires major financial investment. It is necessary to redesign the contract parameters after successful implementation of any quality improvement programme. The paper analyses the impact of the quality improvement initiative upon the profitability of the supply chain and describes how to redesign the contract parameters when return contracts are practised. It also does a risk analysis of the parties and the entire supply chain when return contract is practised along with warranty. It examines how change in order quantity and warranty length impacts supply chain risk as measured by variance of profit.