Strategic sourcing under recall loss sharing and product quality investment

Abstract

Product recall has been a widespread practical operation risk in the production outsourcing. To remit even avoid product recall risk, this paper considers a two-echelon supply chain where the original equipment manufacturer (OEM) orders a critical component from one or two contract manufacturers (CMs) and uses it to produce finished product with potential quality defect. The CMs can decide investment level to reduce defect possibility and share recall loss with the OEM once product recall is implemented. When the recall loss sharing rate is fixed, the OEM may adopt the single sourcing strategy or the dual sourcing strategy which depends on the recall loss sharing rate. Moreover, if the sharing rate is relatively small, the single sourcing strategy is an optimal choice for the OEM. However, when the recall loss sharing rate is determined by the OEM, she prefers to adopt the dual sourcing strategy. Meanwhile, an increase of the recall loss sharing rate may not force the CM to improve product quality. By the numerical analysis, if the marginal recall loss is large or the wholesale price is relatively small, the OEM and the CMs can reach a win-win scenario. Finally, we examine an extension in which the CMs have pricing ability on wholesale price, and the result shows that the OEM can not obtain a cost-reduction benefit under the dual sourcing strategy.Mathematics Subject Classification. 91A35, 91A80, 91B06.

Managing strategies of product quality and price based on trust under different power structures

“…Previous studies on product quality and pricing issues focus on parallel competition decisions between multiple single-tier enterprises of replaceable products [1]. In recent years, there has been research on the analysis of product quality and market pricing from the perspective of game decision-making in a dual-tier supply chain system [3,7,9,16,17]. Gurnani et al [19] studied the quality inputs of suppliers and sales efforts and the retail pricing optimization decision of retailers under a variety of different game structures by assuming the product market demand as a linear function of its quality, retail price, and retailing sales effort.…”