Multitier Incentive Strategies for Quality Improvement: Case of Three‐Tier Supply Chain

Abstract

ABSTRACTThis study investigates a final assembler's (FA) incentive strategies for quality management in the multitier supply chain context. FAs often decide to manage a second‐tier supplier in a reactive way when the first‐tier supplier is unable to control the former. In our model, an FA proactively looks upstream to its first‐tier (S1) and second‐tier (S2) suppliers in a three‐tier supply chain. We develop four proactive strategies with incentives and one reactive strategy with no incentive. We find that, first, proactive strategies are better at improving quality, demand, and profit than reactive strategies are. Second, among proactive strategies, the parallel incentive strategy, centrally controlling both the S1 and S2, imposes the fewest restrictions. It yields superior quality and profit performance for the entire supply chain as well as for individual suppliers. Third, when the tiers are sequentially controlled, proactive incentive strategies promise superior profits for the FA if its unit profitability is not sufficiently high. Finally, the reactive strategy may be more appropriate if the FA's profitability is lower than that of the S1 or S2.