Supply Chain Quality Management by Contract Design

Abstract

Along with the competition intensity globally, quality management activities should go across the firms’ boundaries and be pursued in supply chain environment (Flynn and Flynn 2005; Kaynak and Hartley 2008; Schweinberg 2009; Yeung 2008). Supply chain quality management (SCQM) is the interdisciplinary field between Quality Management (QM) and Supply Chain Management (SCM). SCQM is different from the traditional QM methods such as Statistical Quality Control (SQC), Total Quality Management (TQM) and Quality Management Systems (QMSs), which focus on the implementation of QM in single firm environment. Since one of the QM activities’ characteristics in supply chain situation is that each member makes its QM decisions independently, SCQM is the formal coordination and integration of business processes involving all partner organizations in order to create value and achieve satisfaction of intermediate and final customers (Foster 2008; Kaynak and Hartley 2008; Robinson and Malhotra 2005). SCQM emphasizes the coordination of all members’ QM activities which are driven by all members’ self-interests. In short, SCQM is the effective integration of firms’ internal QM activities. There are many coordination mechanisms to carry out SCQM such as supply chain contracts, information technology, information sharing, and joint decision-making (Corbett et al. 2004; Lee et al. 1997; Robinson and Malhotra 2005). In this chapter we focus on the method of contract design since the implementation of supply chain contracts have the advantages of small cost and convenient operations. It is known that the process of contract design should pay significant attention to all members’ self-interest QM activities and the various supply chain environments. Fortunately, game theory is the natural tool to investigate contract design in various situations of SCQM. We study contract design for SCQM about behavior observability and external failure sharing in a supplier-manufacturer supply chain. In manufacturing supply chains, members’ behavior observability and influencing factors to cost sharing of external failure are two main aspects to influence SCQM implementation (Arshinder et al. 2008; Malchi 2003; Reyniers and Tapiero 1995a, b; Sower 2004). The influencing factors to external failure sharing include the verifiability of external failure, the separability of final product architecture, and the member’s relationship (Baiman et al. 2000, 2001; Balachandran and Radhakrishnan 2005; Bhattacharyya and Lafontaine 1995; Sila et al. 2006). If some behavior of one member is unobservable to other parties, the member will use this condition as a strategic weapon to improve its own profit. The result of this case may damage other parties