Title: Contract design for supply chain quality management

Authors: Dong-Qing Yao, Nanyun Zhang

Addresses: Department of E-Business & Technology Management, College of Business and Economics, Towson University, MD 21252, USA. ' Department of Economics, College of Business and Economics, Towson University, MD 21252, USA

Abstract: Cost reduction has been a major driver of outsourcing. However, recent product recalls suggests that purchasing cost reduction alone is not enough. In this paper, we incorporate the Total Cost of Ownership (TCO) perspective into a two-stage leader-follower game to analyse the decisions made by one buyer and one supplier with a quality cost-sharing contract in a supply chain. Our analysis suggests that the optimal quality chosen by the supplier increases in its own cost efficiency, the buyer|s profit margin and the wholesale price offered by the buyer, the optimal wholesale price set by the buyer decreases in the supplier|s cost efficiency level and its own profit margin and an appropriate cost-sharing percentage exists between the buyer and the supplier. Our research provides managerial insights on how to induce the supplier to offer quality products along the supply chain in today|s global outsourcing environment.

Keywords: Taguchi methods; loss function; leader-follower game; contract design; supply chain management; SCM; supply chain quality; quality management; cost reduction; TCO; total cost of ownership; cost sharing; profit margins; wholesale prices; cost efficiency levels; global outsourcing.

DOI: 10.1504/IJVCM.2009.026954

International Journal of Value Chain Management, 2009 Vol.3 No.2, pp.129 - 145

Published online: 09 Jul 2009 *

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