Contract Design in a Supply Chain With Product Recall and Demand Uncertainty

Abstract

The product recall is becoming a challenging issue in supply chain management, and both suppliers and manufacturers are motivated to exert recall efforts to improve supply chain performance. Considering a supply chain composed of one supplier and one manufacturer with product recalls and demand uncertainty, we investigate the contract design by integrating the revenue sharing contract with three cost sharing policies, namely, fixed-rate cost sharing (Contract F), linear cost sharing (Contract L), and threshold-based cost sharing (Contract T), to coordinate the production quantity and recall efforts. Results show that cost sharing could improve the product recall probability and supply chain profits, but only Contract T can coordinate the supply chain in both production quantity and recall efforts. Moreover, the cost sharing rate in Contract T first decreases and then increases as the recall cost increases. When the recall cost is small (large), Contract T (Contract F) is optimal for the manufacturer. In contrast to our intuition, we find Contract L could overmotivate supply chain members to exert a recall effort that is greater than the first-best when the cost coefficient of recall efforts is large enough. However, demand uncertainty will mitigate the impact of product recalls on motivating recall efforts.

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