Motivated by recent trends towards increasing transparency and traceability, we investigate the impacts of traceability on a supply chain in which a buyer (e.g., a procurement agent or retailer) sources a product from multiple competing suppliers. When a product fails in the field, a penalty cost including the cost of returns and consumers’ ill-will is incurred. We examine the implications of various mechanisms for sharing the penalty cost between supply chain members. With traceability technology, the defective components are traced back to the provider and therefore the corresponding penalty is imposed on the provider; otherwise, providers’ accountability cannot be identified and therefore the penalty cost must be shared between all suppliers using group sharing mechanisms. Each suppl...[ Read more ]

Motivated by recent trends towards increasing transparency and traceability, we investigate the impacts of traceability on a supply chain in which a buyer (e.g., a procurement agent or retailer) sources a product from multiple competing suppliers. When a product fails in the field, a penalty cost including the cost of returns and consumers’ ill-will is incurred. We examine the implications of various mechanisms for sharing the penalty cost between supply chain members. With traceability technology, the defective components are traced back to the provider and therefore the corresponding penalty is imposed on the provider; otherwise, providers’ accountability cannot be identified and therefore the penalty cost must be shared between all suppliers using group sharing mechanisms. Each supplier can make costly efforts to improve its product’s quality, and a higher quality leads to a lower failure rate and therefore a lower penalty cost. Another benefit of a higher quality is to gain a larger market share in a competing market. In a multi-agent game-theoretic setting in which prices are set by either the buyer or the suppliers, we first fully characterize the equilibrium outcomes and then investigate the impacts of traceability on the product quality and welfare of supply chain members under both pricing schemes. We find that traceability may either reduce or improve product quality, depending on the cost of quality improvement, the pricing authority, and the cost of adopting traceability. We further identify certain conditions under which traceability leads to a “win-win” outcome that benefits both the buyer and suppliers. Our analysis also reveals that traceability improves operational efficiency and can always achieve the first-best outcome.

Keywords: Product Quality; Traceability; Return; Nash Equilibrium; Externality