Improving Supplier Compliance Through Joint and Shared Audits with Collective Penalty

• DOI: 10.1287/msom.2017.0653
• Publication Date: 2018-04-17T12:32:26Z
• Authors: Felipe Caro; Prashant Chintapalli; Kumar Rajaram; Chris S. Tang
• Keywords: Marketing; Operations Research; supply chain risk; supplier compliance; Applied Mathematics; 0502 economics and business; 05 social sciences; Business and Management; socially responsible operations; audits; collective penalty

When suppliers (i.e., contract manufacturers) fail to comply with health and safety regulations, buyers (retailers) are compelled improve supplier compliance by conducting audits imposing penalties. As a benchmark, we first consider the independent audit-penalty mechanism in which conduct their respective impose penalties independently. We then examine implications of two new mechanisms that entail collective penalty. The is joint under jointly, share total audit cost incurred, penalty if fails audit. second shared each buyer conducts independently, shares its reports other buyers, imposes any one audits. Using simultaneous-move game-theoretic model supplier, our analysis reveals both beneficial several ways. First, when wholesale price exogenously given, establish following analytical results for comparison mechanism: (a) supplier’s level higher; (b) profit lower while buyers’ profits (c) damage high, creates supply chain value so can offer an appropriate transfer payment make better off. Second, mechanism, similar but more restrictive conditions. Finally, endogenously determined numerical shows key continue hold. online appendix available at https://doi.org/10.1287/msom.2017.0653 .