Incentive Mechanism for Sustainable Improvement in a Supply Chain

EuiBeom Jeong, GeunWan Park and Seung Ho Yoo
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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

Sustainability, 2019, vol. 11, issue 13, 1-18

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.

Keywords: incentive mechanism; environmental quality; climate change; supply chain management (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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