Procurement in Supply Chains When the End-Product Exhibits the 'Weakest Link' Property

Baiman, Stanley; Netessine, Serguei; Kunreuther, Howard

doi:10.2139/ssrn.2077640

Cited by 25 publications

(23 citation statements)

References 25 publications

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“…There have been a number of applications of the revelation principle in the supply chain literature: e.g., Chen [25] studies auction design in the context of supplier procurement contracts; Corbett [26] studies inventory contract design; Baiman et al [4] study procurement of quality in a supply chain. Downloaded from informs.org by [54.191.190 …”

Section: Screeningmentioning

confidence: 99%

Game Theory in Supply Chain Analysis

Cachon¹,

Netessine²

2006

Models, Methods, and Applications for Innovative Decision Making

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Game theory has become an essential tool in the analysis of supply chains with multiple agents, often with conflicting objectives. This chapter surveys the applications of game theory to supply chain analysis and outlines game-theoretic concepts that have potential for future application. We discuss both noncooperative and cooperative game theory in static and dynamic settings. Careful attention is given to techniques for demonstrating the existence and uniqueness of equilibrium in noncooperative games. A newsvendor game is employed throughout to demonstrate the application of various tools.

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Section: Screeningmentioning

confidence: 99%

Game Theory in Supply Chain Analysis

Cachon¹,

Netessine²

2006

Models, Methods, and Applications for Innovative Decision Making

Self Cite

166

168

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“…The final product is defective if any party in the supply chain fails to provide failure-free products, which is called 'the weakest link property' (see Baiman, Netessine, and Kunreuther (2003) and Chao, Iravani, and Savaskan (2009)). There are three ways to get a defective final product: (1) defective components and perfect manufacturing processing;…”

Section: Model Descriptionmentioning

confidence: 99%

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

Gao

Cheng

Shen

et al. 2016

International Journal of Production Research

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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.

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“…In a subsequent paper, Baiman et al (2003) examine a product structure exhibiting the weakest link property and investigate how the internal and external failure cost sharing mechanisms impact supplier selection when there is an adverse selection problem. Their analysis considers moral hazard only on the supplier side, whereas we model moral hazard both on the manufacturer and on the supplier side.…”

Section: Literaturementioning

confidence: 99%

Quality Improvement Incentives and Product Recall Cost Sharing Contracts

2009

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As companies outsource more product design and manufacturing activities to other members of the supply chain, improving end-product quality has become an endeavor extending beyond the boundaries of the firms' in-house process capabilities. In this paper, we discuss two contractual agreements by which product recall costs can be shared between a manufacturer and a supplier to induce quality improvement effort. More specifically, we consider (i) cost sharing based on selective root cause analysis (Contract S), and (ii) partial cost sharing based on complete root cause analysis (Contract P). Using insights from supermodular game theory, for each contractual agreement, we characterize the levels of effort the manufacturer and the supplier would exert in equilibrium to improve their component failure rate when their effort choices are subject to moral hazard. We show that both Contract S and Contract P can achieve the first best effort levels; however, Contract S results in higher profits for the manufacturer and the supply chain. For the case in which the information about the quality of the supplier's product is not revealed to the manufacturer (i.e., the case of information asymmetry), we develop a menu of contracts that can be used to mitigate the impact of information asymmetry. We show that the menu of contracts not only significantly decreases the manufacturer's cost due to information asymmetry, but also improves product quality.reliability, quality control, contracts, product design, supply chain coordination, information asymmetry

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Procurement in Supply Chains When the End-Product Exhibits the 'Weakest Link' Property

Cited by 25 publications

References 25 publications

Game Theory in Supply Chain Analysis

Game Theory in Supply Chain Analysis

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

Quality Improvement Incentives and Product Recall Cost Sharing Contracts

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