Strategic sourcing under recall loss sharing and product quality investment

Binwei DONG, Wansheng TANG*, Chi ZHOU

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

1 Citation (Scopus)


Product recall has been a widespread practical operation risk in the production outsourcing. To remit even avoid product recall risk, this paper considers a two-echelon supply chain where the original equipment manufacturer (OEM) orders a critical component from one or two contract manufacturers (CMs) and uses it to produce finished product with potential quality defect. The CMs can decide investment level to reduce defect possibility and share recall loss with the OEM once product recall is implemented. When the recall loss sharing rate is fixed, the OEM may adopt the single sourcing strategy or the dual sourcing strategy which depends on the recall loss sharing rate. Moreover, if the sharing rate is relatively small, the single sourcing strategy is an optimal choice for the OEM. However, when the recall loss sharing rate is determined by the OEM, she prefers to adopt the dual sourcing strategy. Meanwhile, an increase of the recall loss sharing rate may not force the CM to improve product quality. By the numerical analysis, if the marginal recall loss is large or the wholesale price is relatively small, the OEM and the CMs can reach a win-win scenario. Finally, we examine an extension in which the CMs have pricing ability on wholesale price, and the result shows that the OEM can not obtain a cost-reduction benefit under the dual sourcing strategy.

Original languageEnglish
Pages (from-to)1133-1160
Number of pages28
JournalRAIRO - Operations Research
Issue number4
Early online date12 Jun 2020
Publication statusPublished - Jul 2020
Externally publishedYes

Bibliographical note

This work is supported by the National Natural Science Foundation of China (No. 71771164 and No. 71702129), Humanity and Social Science Youth Foundation of Ministry of Education of China (No. 17YJC630232).


  • Contract manufacturing
  • Dual sourcing
  • Game theory
  • Quality investment
  • Recall loss sharing


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