Cooperative quality investment in outsourcing and its impact on supply-chain performance

Abstract

This paper highlights the importance of cooperative quality investment (CQI) strategy and proposes a simple proportional investment sharing schedule in outsourcing of a supply chain, which consists of a single contract manufacturer (CM) and one original equipment manufacturers (OEM) whose demands are both sensitive to price and product quality. A three-stage dynamic game-theoretic framework is applied to describe decisions of every entity. In particular, we analyze two possible decision structures of quality choice: the CM optimally sets product quality and the OEM chooses product quality. By the backward induction approach, we obtain the analytical equilibrium solutions for each decision scenario. We find that if the CM is willing to share sufficient large investment fraction, the CQI strategy will be beneficial to quality enhancement no matter who sets product quality level. On the respect of equilibrium payoffs (profits), this study shows that each of the players always prefers to have complete control on quality choice with implementation of the CQI strategy. In addition, the supply-chain performance can be improved by practicing the CQI strategy. Furthermore, we explicitly put forwards the conditions for realizing this improvement.