【Title】Procurement Contracting under Product Recall Risk 

【Speaker】Dr.Gang Wang, Operation Management(OTIM), Kenan-Flagler Business School, University of North Carolina at Chapel Hill, USA

【Host】Dr. Zhizhong Li

【Time】January 03, 2014, 13:30-14:30

【Location】Room 412, Shun-de Building

【Abstract】Product recall is commonly observed in various industries with production outsourcing. Managing product quality and mitigating the financial impact of product recalls pose great challenges to manufacturers due to demand uncertainty and non-contractibility of suppliers’ quality effort. To understand the interdependence of supply chain quantity and quality decisions, we develop a procurement contractual framework under both demand and recall risks. We consider a model in which a manufacturer outsources to a supplier the production of a component, which is subject to potential quality failure leading to a product recall. The manufacturer acts as the Stackelberg leader offering a recall cost sharing contract to the supplier. We analyze two settings: a pull system in which the supplier makes the quantity decision and a push system in which the manufacturer makes the quantity decision. We find that the manufacturer achieves a higher production quantity and induces a higher quality effort of the supplier in the push system than in the pull system. Therefore, the manufacturer can improve quality by taking on the demand risk of the supply chain. Moreover, the presence of product recall risk decreases the production quantity in the push system but weakly increases the production quantity in the pull system. Interestingly, the manufacturer can improve quality and profit by decreasing her share of the total recall cost without affecting the production quantity of the supply chain in both the push and pull systems.