Financial Incentives to Avoid Major Quality Problems in a Supply Chain

Susan A. Slotnick and Matthew J. Sobel

Foundations and Trends(R) in Technology, Information and Operations Management, 2019, vol. 12, issue 2-3, 316-333

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.

Keywords: Risk management; Hedging; Operational risk; Supply chain finance (search for similar items in EconPapers)
JEL-codes: G32 M11 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1561/0200000090 (application/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:now:fnttom:0200000090

Access Statistics for this article

More articles in Foundations and Trends(R) in Technology, Information and Operations Management from now publishers
Bibliographic data for series maintained by Lucy Wiseman ().