Quality Incentive Strategies in a Multi-Tier Supply Chain: Comparison of Practices in Korea and U.S. and Introduction of Proactive Incentive Strategies

Quality Incentive Strategies in a Multi-Tier Supply Chain: Comparison of Practices in Korea and U.S. and Introduction of Proactive Incentive Strategies Quality Incentive Strategies in a Multi-Tier Supply Chain: Comparison of Practices in Korea and U.S. and Introduction of Proactive Incentive Strategies Keywords Supply chain management Supply chain collaboration Multi-tier supply chain Supplier quality Incentive contract Three-tier supply chain Second-tier supplier Principal-agent paradigm Triads in supply networks Buyer-supplier collaboration Supplier-supplier collaboration Research Goals Many final assemblers nowadays run their businesses in a multi-tier supply chain system, delegating the production of a main component to a first-tier supplier, which performs its own R&D and also subcontracts the production of a subcomponent to lower-tier suppliers. However, there are few studies investigating incentive strategies to proactively control overall quality in a multi-tier supply chain. In this research project, the case study of supply chain practices in Korea and U.S. will offer an opportunity to learn best practices and reveal important practical implications to facilitate effective collaboration in a multi-tier supply chain. We will also introduce various incentive strategies and mathematically investigate them, so as to provide an important guideline to the practice by clarifying with which strategy the final assembler can best enhance overall performances of a multi-tier supply chain. Research Description The case research in this project focuses on inductive theory generation and aims to enhance the understanding of the effective strategies for multi-tier supply chain management. We will survey various collaboration practices of multi-tier supply chains, especially in Korea and U.S. Then, we will investigate best practices to proactively control quality at both first-tier and lower-tier suppliers by empirically testing similarities and differences across practices in different environments for theoretical generalizations. This will help identify the best collaboration strategies which can be differently adopted depending upon environmental situations, while offering important implications for the multi-tier supply chain management, especially to Korean companies. The mathematical study considers a three-tier supply chain, consisting of a final assembler, a first-tier supplier (S1) and a second-tier supplier (S2). The final assembler delegates the production of a main component to S1, which also subcontracts the production of a subcomponent to S2 as in many practices. We will introduce various supply chain models with different incentive strategies, considering possible interactions and incentive-offering paths among three players. We have developed five models for testing so far, and they will be modified based on the survey on multi-tier supply chain collaboration practices in Korea and U.S. The comparison of supply chain models will provide a clear guideline clarifying the conditions under which a final assembler can adopt them and yield superior performances. Expected Research Outcomes Through both case and mathematical studies, we expect that this research project will contribute to the supply chain literature and help firms effective management of multi-tier supply chains, including lower-tier suppliers. First, the case study investigating best practices will offer an opportunity to reveal important practical implications to facilitate effective supply chain collaboration in a multi-tier supply chain. Second, this is the first research mathematically investigating proactive quality incentive strategies in a multi-tier supply chain system. We will introduce various proactive incentive strategies which can control both first-tier and lower-tier suppliers, differently from the previous studies with penalty schemes in a dyadic relationship. Third, we offer a guideline by clarifying the conditions under which a final assembler can adopt them. Moreover, we will reveal the proactive incentive strategy, yielding a superior performance. This will help firms choose the best way to control multi-tier supply chains.