Quality investment and inspection policy in a supplier-manufacturer supply chain

This paper examines a serial supply chain that consists of one supplier and one manufacturer, each having imperfect production and inspection processes. Both the supplier and the manufacturer invest in quality improvement actions in their production processes to reduce defective items being produced. In addition to quality investment, the supplier engages in outbound inspection before sending the components to the manufacturer, and the manufacturer engages in inbound inspection, when receiving the components from the supplier, and outbound inspection, before sending final products to customers. We investigate the supplier's and the manufacturer's quality investment and inspection strategies in four noncooperative games with different degrees of information revealed. We study the effects of inspection-related information on both parties' equilibrium strategies and profits, and further assess, at equilibrium, the rationality of the penalty on defective components.