Promoting Service Quality via Supplier Competition and Incentive Contracts

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This research project examines how a buyer should allocate demand across potential suppliers to promote high quality service. The research activities are organized into three areas: (1) developing a general framework for service competition among suppliers that will take into account a variety of service criteria for selecting suppliers and allocating demand and various forms of supplier effort such as inventory, capacity, and workforce training; (2) examining noncompetitive contracts for influencing service levels and comparing the performance of these contracts against various competition-based schemes; and (3) assessing possible behavioral gaps in the developed theory through a series of experiments involving human subjects. The first two components are analytical in nature and require combining economic and game theoretic concepts with queueing and inventory theory. The last component draws from behavioral theory and tests the robustness of our analytical results to human implementation. The project also includes an initial empirical investigation of how supplier competition and incentive contracts are currently structured at five industry sites, and will involve international collaboration with researchers in Hong-Kong. If successful, the project will yield a set of guidelines that procurement professionals can use in managing their supplier selection and demand allocation decisions. The analytical research will provide insight into what types of competition or incentive-based schemes are most effective for buyers and suppliers in different market environments. The experimental games will serve as a useful training tool for buyers and suppliers who are considering adopting service-based contracts or setting up service-based competitions. The general framework will also provide a roadmap for future researchers working in the supply management field. The research will offer educational benefits through the participation of graduate and undergraduate students and through the development of course materials and a teaching computer game.