Product Quality Management in a Supply Chain with Competition : The Value of Tracing and Recalls

Problem definition: This paper studies the effects of product tracing and recalls in a supply chain with one retailer and multiple manufacturers, each of which may reduce the product quality below the required standard to save production cost, but at the risk of being caught.Academic/practical relevance: We investigate the impacts and benefits of the adoption of traceability and separation technologies on the product quality and supply chain members. Depending on whether or not to adopt a traceability technology and whether or not to separate products by manufacturers when product tracing is implemented, different methods on how to allocate the quality-related penalty cost are considered. We study the efficiency and fairness for three widely-used mechanisms that incentivize manufacturers to improve product quality.Methodology: We develop a game theoretical framework in a supply chain setting to study the product quality management under competition in the presence of tracing and recalls under different mechanisms for penalty cost allocation.Results: We have revealed several interesting and potentially useful insights on the base model with two competing manufacturers.(a) There exists a unique Nash equilibrium under any of the three mechanisms;(b) The quality at the equilibrium is the highest with traceability and separation, while the quality without traceability is the lowest;(c) The retailer always benefits from product tracing, with or without separation;(d) Product tracing may hurt the retailer unless separation is implemented.Managerial implications: These analytical results and managerial insights continue to hold in a generalized case with more than two manufacturers and when manufacturers are asymmetric in the cost of quality improvement. Our extensive numerical study further strengthens these findings. Moreover, we also observe that the adoption of product tracing and separation could lead to a ``win-win" outcome for all supply chain members in most scenarios, which suggests that the new technologies should be implemented in practice