Incentives for quality improvement efforts coordination in supply chains with partial cost allocation contract

Abstract

In this paper, we consider quality improvement efforts coordination in a two-stage decentralised supply chain with a partial cost allocation contract. The supply chain consists of one supplier and one manufacturer, both of which produce defective products. Two kinds of failure cost occur within the supply chain: internal and external. The supplier and the manufacturer determine their individual quality levels to maximise their own profits. We propose a partial cost allocation contract, under which the external failure cost is allocated between the manufacturer and the supplier at different rates based on information derived from failure root cause analysis. If the quality levels of the supplier and the manufacturer are observable, we show that the partial cost allocation contract coordinates the supply chain, provided that the failure root cause analysis does not erroneously identify the manufacturer's fault as the supplier's, and the supplier does not take responsibility for the manufacture's fault. In the single moral hazard model, where only the quality level of the supplier is unobservable, the optimal share rates require the supplier to take some responsibility for the manufacture's fault. However, in the double moral hazard model, where quality levels of the supplier and the manufacturer are unobservable to each other, the optimal share rates require the supplier not to take responsibility for the manufacturer's fault. It is noted that the root cause analysis conducted by the manufacturer may have its disadvantage in attributing the fault to the supplier when both sides are at fault. We also propose a contract based on the dual root cause analysis to reduce the supplier's penalty cost. Numerical results illustrate that the partial cost allocation contract satisfies the fairness criterion compared with the traditional cost allocation contract.

A multi-retailer sustainable supply chain model with information sharing and quality deterioration

“…He suggested an integrated model to cut the production of substandard items. Gao [15] developed a probabilistic models for the production and operational incitements by improving quality and coordination in supply chains with cots allocations. Majumder et al [28] and Dey et al [13] proposed the improvement in the production quality with the reduction in setup cost and setup time for vendor-buyer supply chain model.…”

What modelling research on supply chain collaboration informs us? Identifying key themes and future directions through a literature review

“…It is shown that increasing efficiency to get financial advantages is obviously more attractive. Profit is still the most important performance indicator in SCC research, although quality and environment are paid more and more attentions in recent years, such as Yang, Lu, and Xu (2016), Xiao, Yang, and Shen (2011) and Gao et al (2016) in the International Journal of Production Research. It is anticipated to have more similar SCC studies addressing the improvement of quality and environment-related performance in future research.…”

The value of supply chain coordination under moral hazard: A case study of the consumer product supply chain

“…This finding is unique in the literature on supply chain management. Furthermore, Gao et al [ 13 ] considered single and double moral hazard models with quality level uncertainties and proposed a partial cost allocation contract which can fairly allocate defective costs.…”