Product Quality Management in a Supply Chain with Competition: The Value of Tracing and Recalls

Abstract

Problem definition: Tracing the responsibility for defective products and sharing the related cost for product recalls resulting from quality issues are critical for product quality management in a supply chain setting. This paper studies the effects of product tracing and recalls in a supply chain with one retailer and multiple competing manufacturers, each of which may reduce product quality to save production cost, but at the risk of being caught. Methodology/results:: We develop a game theoretical framework in a supply chain setting to study the product quality management under competition in the presence of tracing and recalls. We examine the impacts of the adoption of traceability-enabled technologies on product quality and welfare of the supply chain members. We also investigate the efficiency and fairness of traceability adoption that incentivizes manufacturers to improve product quality. Our analysis shows that traceability always improves product quality, but it may either hurt or benefit some or even all supply chain members depending on the magnitude of the model primitives. Managerial implications: These analytical results and managerial insights continue to hold in various cases with imperfect quality inspection, bilateral bargain in determining the responsibility for penalty cost, asymmetric manufacturers differing in the cost of quality improvement, and unobservable qualities, which further ensures the robustness of our findings. We observe that the adoption of traceability could lead to a supply chain coordination with a ``win-win outcome for all parties under certain conditions, which further implies that these new technologies should be implemented in practice but with cautious.