Product quality selection: Contractual agreements and supplier competition in an assemble-to-order environment

Product quality selection: Contractual agreements and supplier competition in an assemble-to-order environment

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Article ID: iaor2013387
Volume: 141
Issue: 2
Start Page Number: 626
End Page Number: 638
Publication Date: Feb 2013
Journal: International Journal of Production Economics
Authors: ,
Keywords: production: FMS, management, supply & supply chains
Abstract:

We consider a multi‐supplier, single‐manufacturer supply chain where each supplier sells a different component at varying quality levels. The manufacturer has to decide on which quality level to choose for each component, trading‐off the total cost and total quality. Each supplier decides on a price per unit quality level for its component. We characterize the strategic interaction among the suppliers and analyze the inefficiencies. We find that the inefficiencies due to such quality competition can be quite significant. We then propose and analyze several mechanisms, such as quality‐price schedules and revenue sharing, that restore efficiency.

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