The effect of acceptance sampling and risk aversion on the quality delivered by suppliers

Firms often use acceptance sampling to monitor the quality of the raw materials and components delivered by suppliers. This paper uses numerical methods to examine how a risk averse supplier reacts to the acceptance sampling plan used by a customer. It assumes that the supplier produces and delivers a quality level that maximizes the supplier’s expected utility. It examines the sensitivity of the optimal delivered quality to changes in the price, to changes in the supplier’s level of risk aversion, and to changes in the parameters of the customer’s sampling plan. It concludes that risk averse suppliers deliver higher quality, that higher capability suppliers do not necessarily deliver higher quality, and that the optimal quality is sensitive to the lot size. It also concludes that since the risk of rejection motivates suppliers to improve quality, customers have an economic justification for using acceptance sampling even when there is no statistical justification.