Quality investment strategies in a complementary supply chain with an unreliable supplier

Abstract

<p style='text-indent:20px;'>This study investigates investment strategy in a supply chain that comprises one manufacturer and two complementary suppliers - a reliable supplier and an unreliable supplier. The unreliable supplier's quality improvement capacity is uncertain. Where the manufacturer determines to invest in which suppliers' quality improvement activities and suppliers decide the quality improvement levels of their components, respectively. We demonstrate three potential strategies to highlight the manufacturer's and suppliers' optimal choices: investing in an unreliable supplier, investing in a reliable supplier, and investing in both. Investing in two suppliers results in higher quality improvement levels and profits for the manufacturer, and the optimal level of product quality improvement is not monotonically related to the efficiency rate. The unreliable supplier can benefit the most from the investment strategy, while the manufacturer profits the least. The uncertainty of an unreliable supplier is more likely to affect a reliable supplier than himself. There are two effects: mutual hold-up and spillover effects result in counter-intuitive findings. Lastly, we relax our assumptions to examine their impacts on the manufacturer's strategy choice.</p>