The incentive effect of acceptance sampling plans in a supply chain with endogenous product quality

Authors

  • Hong Wan,

    Corresponding author
    1. Department of Supply Chain Management and Marketing Sciences, Rutgers, The State University of New Jersey, Newark, New Jersey 07102
    • Department of Supply Chain Management and Marketing Sciences, Rutgers, The State University of New Jersey, Newark, New Jersey 07102
    Search for more papers by this author
  • Xiaowei Xu,

    1. Department of Supply Chain Management and Marketing Sciences, Rutgers, The State University of New Jersey, Newark, New Jersey 07102
    Search for more papers by this author
  • Tian Ni

    1. School of Industrial Engineering, Purdue University, West Lafayette, Indiana 47907
    Search for more papers by this author

Abstract

This article studies a firm that procures a product from a supplier. The quality of each product unit is measured by a continuous variable that follows a normal distribution and is correlated within a batch. The firm conducts an inspection and pays the supplier only if the product batch passes the inspection. The inspection not only serves the purpose of preventing a bad batch from reaching customers but also offers the supplier an incentive to improve product quality. The firm determines the acceptance sampling plan, and the supplier determines the quality effort level in either a simultaneous game or a Stackelberg leadership game, in which both parties share inspection cost and recall loss caused by low product quality. In the simultaneous game, we identify the Nash equilibrium form, provide sufficient conditions that guarantee the existence of a pure strategy Nash equilibrium, and find parameter settings under which the decentralized and centralized supply chains achieve the same outcome. By numerical experiments, we show that the firm's acceptance sampling plan and the supplier's quality effort level are sensitive to both the recall loss sharing ratio and the game format (i.e., the precommitment assumption of the inspection policy). © 2013 Wiley Periodicals, Inc. Naval Research Logistics, 2013

Ancillary