Process design quality determines the product manufacturability, and hence influences the product quality. In a production outsourcing environment, the supplier's quality effort is generally non-contractible, and the process design quality may be asymmetric between the supplier and the manufacturer as it is the designer's private information. The asymmetric information brings great challenges for the manufacturer to design the quality incentive contract. In this paper, a manufacturer, who outsources the production to a supplier and keeps the process design in-house, or outsources both the process design and production, is considered. The final product quality is determined by the supplier's quality effort and the process design quality. The manufacturer's incentive-compatible quality contracts are examined by the Stackelberg Game theory and the incentive theory under the two outsourcing scenarios.
It is shown that:a) the manufacturer can achieve the first-best quality and profit if the process design quality is common knowledge. b) The manufacturer with a high process design quality will decrease its quality penalty and increase the procurement price to signal the process design quality information when the process design quality is the manufacturer's private information. c) If the process design quality is the supplier's private information, the manufacturer can screen the process design quality information by a menu of quality contracts. In the latter case, the contract for the supplier with low process design quality has lower procurement price and quality penalty than that under symmetric process design quality information. By contrast, the procurement price is increased and the quality penalty keeps unchanged in the contract for the supplier with high process design quality. At last, the numerical examples are used to verify the impacts of asymmetric process design quality information on the manufacturer's quality contract.
Our work enriches the supply chain quality management literature by considering the asymmetric process design quality information. The results show that the managers should pay a close attention to the asymmetric process design quality information and design effective incentive contract to improve the supply chain efficiency and product quality.
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