Supply Chain Coordination for Quality Improving

Retailer´s effort for quality information collection and feedback is especially serious for product quality improving. The more effort, the quicker quality improving, the less defective returns in the product life cycle. In the decentralized supply chain, there is lack of incentive for retailer to exert more effort, which leads to the failure of supply chain coordination. In this paper, we designed a transfer payment punishment contract to coordinate the supply chain in order to reduce defective returns, which committed to transfer retailer a payment at the product´ market entry stage for effort cost compensation, and charges penalty for each defective return at the end of product life cycle, the punishment will been deducted from the committed transfer payment. This contract provides an incentive to the retailer to increase his effort, thus decreasing the number of defective returns in the product life cycle. We show that this contract can achieve channel coordination and a win-win outcome for both manufacture and retailer.