Analysis of the third party inspection strategy under asymmetric quality cost information

This paper considers the quality risk in supply chain outsourcing due to asymmetric quality cost information. With the growing trends of global sourcing, Buyers find it more difficult to observe suppliers´ production processes or their capital investments in quality improvement technologies, both of which play a crucial role in determining the product quality. This situation makes quality risk management an even more challenging task. In this paper ,the asymmetric information between enterprises due to outsourcing in supply chain and the resulting effect of cheating on quality cost are studied. Based on the wholesale price contract a stylized contract menu is presented using third party inspection namely random quality cost audit strategy to establish an effective incentive mechanism. The conclusions demonstrate that the new contract can not only eliminate the effect of asymmetric information but also restrain the upriver enterprise from cheating on the quality cost . We also find that the downstream enterprise can improve quality level by raising wholesale price reasonably to stimulate the upriver enterprise to invest more on quality in the new contract. A numerical study is given to demonstrate the conclusions of the paper.