Mechanism Design for Quality Control in ATO Supply Chain with Mixed Inspection

Abstract

This paper studies how to design a mechanism to control the quality of final product and components. Considering that ATO supply chain is composed of multiple component suppliers and a manufacturer, which is the core company and uses incoming inspection and quality tracing to control the quality of components, we presented a quality control model of ATO supply chain and obtain the optimal quality control mechanism consisting of component purchase prices, penalties on defect. We find that the manufacturer will choose the optimal quality level of ATO supply chain; the manufacturer can stimulate suppliers to choose the optimal quality levels of ATO supply chain through designing a reasonable purchase prices and penalties when their reservation payoffs are small, otherwise, it will design a profit transfer mechanism to modify the quality control mechanism, as a result, suppliers will choose the optimal quality levels and the manufacturer’s profit will be maximized.