Title: Encouraging suppliers to process innovations: a game theory approach

Authors: Toni Jarimo, Urho Pulkkinen, Ahti Salo

Addresses: VTT Technical Research Centre of Finland, P.O. Box 1301, 02044 VTT, Finland. ' VTT Technical Research Centre of Finland, P.O. Box 1301, 02044 VTT, Finland. ' Systems Analysis Laboratory, Helsinki University of Technology, P.O. Box 1100, 02015 TKK, Finland

Abstract: This paper studies the design of process-innovation incentives in supplier networks. A real-life case study from the boat-building industry is presented to illustrate the importance of explicitly encouraging suppliers to continuous improvement. Motivated by the case study, we constructed a game theory model trying to capture the possible conflicting interests of different parties in a company network. Using our model, we applied three different bargaining rules in order to determine ex-ante profit-sharing principles that award process-innovations. The aim of profit sharing is that the efficiency-improving arrangements can be implemented so that none of the network companies has to incur losses. Consequently, if the profit-sharing principles are ex-ante contracted, then the network companies have the incentive to innovate.

Keywords: process innovation; supplier networks; incentives; game theory; profit sharing; demand management; supply chain management; SCM; boat building; continuous improvement; Finland; yacht building; utility sharing.

DOI: 10.1504/IJTIP.2005.008590

International Journal of Technology Intelligence and Planning, 2005 Vol.1 No.4, pp.403 - 423

Published online: 04 Jan 2006 *

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