Supply Chain Proximity and Product Quality

Abstract

This paper explores the effect of supply chain proximity on product quality. To study this relationship, we merge four independent data sources from the automotive industry, collecting (i) auto component failure rates, (ii) upstream component factory locations, (iii) downstream assembly plant locations, and (iv) product-level links connecting the upstream and downstream factories. Combining these datasets yields one of the most detailed supply chain samples ever created, detailing the flow of 27,807 products through 529 supplier factories and 175 assembly plants. We find that, on average, the defect rate of a component increases by 0.21 percent when the distance increases by 100 kilometers. Further, we find that supply chain distance is more detrimental to product quality when manufacturers produce early generation models, high-end products, components with more complex configurations, and also when the manufacturers source from suppliers who invest relatively little in research and development.