Reliability improvement incentive strategies in the manufacturing industry

Abstract

PurposeCompanies face the critical reliability problem of products due to the development of outsourcing. This study intends to provide some feasible solutions for a company to improve the reliability level of products.Design/methodology/approachThe paper considers the reward and reliability decisions regarding a product made with two complementary components from two different suppliers: high-capable and low-capable. Two kinds of reliability improvement incentives (normal incentive and cost-sharing incentive) through which a manufacturer provides a reward and shares the reliability improvement cost with a supplier are discussed. As the Stackelberg leader, the manufacturer determines the strategy, while the suppliers are responsible for determining its reliability. Using a game-theoretic framework, four different contract scenarios are addressed. We develop analytical methods to better understand how the manufacturer decides the incentive mechanism to be used for the suppliers.FindingsThe results show that cost-sharing contracts do not always lead to a higher reliability level and more enormous profits. Setting a target reliability level is better for the manufacturer. The cost-sharing contract is beneficial for a high-capable supplier even though it does not directly participate in that kind of mechanism. A low-capable supplier gains more profit when the manufacturer provides incentive mechanisms that do not specify a target reliability level.Originality/valueThis paper investigates the reliability improvement mechanism used for complementary products and focuses on identifying the optimal decisions when demand is influenced by the gap between the product's failure rate and the standard failure rate.