Quality Risk In Outsourcing: Noncontractible Product Quality And Private Quality Cost Information
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Overview: Recent trends in outsourcing have spread contract manufacturers (CMs) responsibility to new areas such as sourcing, design, and even research and development. This research paper from Stanford University is based on quality risk as lower OEM profits and product quality in the OEM-CM channel relative to a vertically integrated firm. The objective is to characterize the effects of each quality risk factor, and to design contracts that maximize the OEMs profit by mitigating quality risk. It also explains the effect of the OEMs product-pricing strategy on OEMs profit and on product quality.