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Financial Incentives to Avoid Major Quality Problems in a Supply Chain

Author

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  • Slotnick, Susan A.
  • Sobel, Matthew J.

Abstract

Manufacturers who outsource components incur risks as well as benefits. If the supplied product has a major quality defect, the adverse effect on the manufacturer’s reputation reduces its market share. This paper presents a discrete-time model of a buyer who collaborates with a sole supplier to avoid quality problems by paying a higher per-unit purchase price to the supplier and/or paying the supplier a lump sum contingent on the absence of a major quality defect. Analytical results include an optimal risk-posture policy for which the buyer should use only one of these financial incentives or the other, and computational results provide insights about the relationship of that optimal policy to various parameters.

Suggested Citation

  • Slotnick, Susan A. & Sobel, Matthew J., 2019. "Financial Incentives to Avoid Major Quality Problems in a Supply Chain," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 316-333, March.
    • Handle: RePEc:now:fnttom:0200000090
    DOI: 10.1561/0200000090
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    References listed on IDEAS

    as
    1. Mahesh Nagarajan & Yehuda Bassok, 2008. "A Bargaining Framework in Supply Chains: The Assembly Problem," Management Science, INFORMS, vol. 54(8), pages 1482-1496, August.
    2. Gérard P. Cachon & Martin A. Lariviere, 2001. "Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain," Management Science, INFORMS, vol. 47(5), pages 629-646, May.
    3. Terry A. Taylor & Erica L. Plambeck, 2007. "Simple Relational Contracts to Motivate Capacity Investment: Price Only vs. Price and Quantity," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 94-113, January.
    4. Helper, Susan, 1991. "Strategy and Irreversibility in Supplier Relations: The Case of the U.S. Automobile Industry," Business History Review, Cambridge University Press, vol. 65(4), pages 781-824, January.
    5. Brian Tomlin, 2003. "Capacity Investments in Supply Chains: Sharing the Gain Rather Than Sharing the Pain," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 317-333, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Risk management; Hedging; Operational risk; Supply chain finance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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