Quality Control and Signaling Strategy in Supply Chain

Abstract

Based on the principal-agent theory, this paper constructs quality signaling game model in supply chain under the condition of asymmetric information. The supplier makes the production process investment decision and determines the type of production process level (high level type or low level type), who will also make quality prevention strategy and determine its products quality prevention level. The manufacturer makes the quality appraisal strategy and processing strategy when it accepts the intermediary components, who will also determine its products quality inspection level and processing level. In this paper, we analyze the supplier may signal the type of production process investment level to the manufacturer in order to obtain the optimal incentive contracts. We take use of the optimal theory to establish supplier’s production process quality prevention model and manufacturer’s products quality inspection model and investigate the manufacturer's information rents to motivate supplier to improve products quality level. This paper will prove that: the supplier may have the incentives to signal the type of production process investment level to the manufacturer, and improve its products quality prevention level in its production process. When the manufacturer observes supplier’s signals of products quality level, it will reduce quality inspection level and improve processing level. With the improvement of supplier’s quality prevention level, its warranty payments and price rebate will decrease, the manufacturer will increase its upfront payments and reduce apportionment ratio of external failure cost. Meanwhile the integrated supply chain’s joint expected profits will also increase, and then the manufacturer will reduce the supplier’s information rents obviously. Above all, we analyze the causes of ratchet effects and provide corresponding quantitative descriptions and proofs for our conclusions respectively.