Supply Chain Contracts for Quality Investment Incentives

This paper investigates contracts for quality investment incentives in a supply chain consisting of an original equipment manufacturer (OEM) and a contract manufacturer (CM) with price- and quality-sensitive demand. The OEM out sources the production to the CM who invests to guarantee quality, while the OEM is responsible for product sales and product pricing. We analyze their individual optimal strategies under three types of contract, i.e., a wholesale price contract, a revenue sharing contract, and a cost sharing contract. We also explore the best contract from the perspective of the whole supply chain performance.