Multi-period quality and pricing decision in production-focused and market-focused supply chains: How to manage a long-term contractual relationship

Abstract

This study investigates the effect of the long-term contract on multi-period decisions regarding product quality and sales price in a production-focused supply chain (PSC) and a market-focused supply chain (MSC). By introducing cumulative quality investment over time as in practice and comparing long-term supply chain performance, we reveal that the relationship between supply chain players is the key factor impacting long-term performance. To enhance the supply chain's long-term profit performance, we find the contract condition should be more advantageous to the supplier responsible for product quality than to the buyer deciding on the sales price, regardless of supply chain types and environmental changes. We also reveal that the MSC can outperform the PSC in the long run. However, it should be noted that the contract condition needs to be more advantageous to the supplier in the MSC than in the PSC. We provide new and significant guidelines for practicing managers by revealing that long-term decisions should differ from single-period decisions.