Effect of coordinated replenishment policies on quality

Coordinated replenishment is a supply chain policy that affects many operational performance measures, including cost, lead time, and quality. In this paper, we develop a mathematical model of a simplified supply chain in which conformance quality is one of the supplier's decision variables and both the supplier and its customer are trying to minimize expected annual cost. Our expected cost model includes the important quality costs (appraisal, prevention, internal failure, and external failure) as well as holding, set-up, and ordering costs. Our results indicate that coordination leads to a decline in total cost but that coordination does not necessarily lead to an improvement in quality. In other words, buyers who are using coordinated replenishment may be trading higher quality for lower cost.