نوآوری و ضایعات در مدیریت زنجیره تامین

We study a supply chain relationship in which the buyer outsources production of a component to the supplier. The buyer also produces a component and combines it with the supplier's input to yield the final output. The supplier can upgrade production of his input via costly innovation. Neither the supplier's effort for innovation nor the result of the innovative activity can be publicly verified. We show that, when the cost of innovation is large, the buyer's optimal contract may induce ‘wasting’ a fraction of the supplier's input.

A tenet of supply chain management is eliminating waste, as manufacturers often produce some units of a component or intermediate good in excess of what is used at a later production stage. While “Sell One, Buy One, Make One,” is the cornerstone of Just-In-Time logistics, even the best “lean” manufacturers are said to be wasting about 30% of their resources.2 For a wide range of products in high-tech industries, product-specific components are incorporated into final products, and while some of the unused units of these components are recycled, others become waste. So why is it so hard to eliminate waste? The current study suggests that waste of intermediate products can stem from an optimal incentive provision in supply chain management when process innovation improves both production cost and product quality.3 In particular, our analysis reveals that wasting some inputs can take place as a part of optimal strategy when the supply chain involves a relation-specific investment in producing some intermediate good. We model a vertical relationship in which the buyer and the supplier engage in the production of complementary inputs. The buyer purchases a component produced by the supplier and combines it with her own component to yield the final product. Thus, we postulate that the buyer is partially vertically integrated, i.e., one component is produced in-house, the production of the other is outsourced. This is a common situation in various industries including auto manufacturing and consumer electronics.4 Production of the supplier's component depends on the technology which is in place. The supplier may invest in an innovative activity (R&D hereafter) with an uncertain outcome. Absent R&D or if R&D fails, the supplier uses a ‘basic’ technology. If the supplier conducts R&D and the result is a success, the supplier uses an ‘advanced’ technology which involves a process innovation of his input. The component produced by the buyer is manufactured with a given technology. To preview our results, when the supplier's input is linked to costly R&D, his input may be wasted systematically as a result of incentive provision in the vertical relationship. As usual in an agency model, neither the supplier's R&D effort (hidden action) nor the R&D result (hidden information) can be publicly verified in our model, which leads to the distortion that we identify in this paper: The buyer's optimal contract may induce ‘wasting’ a fraction of the supplier's input when the R&D cost is sufficiently large. The optimal way to induce an R&D effort is to compensate the supplier for the R&D investment only when the supplier reports that the R&D was successful. When the R&D cost is small, the supplier's incentive for the R&D investment is not the buyer's concern. However, the buyer must still induce the supplier to truthfully report the R&D result. The supplier may have an incentive to exaggerate the production cost for higher compensation. Thus, to induce a truthful report of the R&D result, the buyer must give an information rent to the supplier. It follows that, when the amount of expected information rent for a truthful report covers the R&D cost, the buyer does not need to worry about the supplier's incentive to invest in R&D. When the R&D requires a large investment, the supplier may have an incentive to report that the R&D succeeded without conducting it. To mitigate such an incentive problem, the buyer overpurchases the supplier's component (relative to the first best) in the case of a successful R&D. If the supplier misreports that the R&D succeeded without investing in it, then he has to overproduce the component at the high cost of production, but will be compensated only for the low cost of production. This, in turn, discourages the supplier from misrepresenting the R&D result as a success without an investment. Thus, when the R&D cost is large (but below some bound), the overpurchase of the supplier's component for a successful R&D may lead to wasting a fraction of the supplier's input in the supply chain. According to our result, both the amount and the proportion of waste increases, as the R&D cost increases. The relationship between R&D cost and the prevalence and amount of waste is potentially empirically testable. We also show that there is less waste as the difference between the R&D results increases (i.e., as the innovation becomes larger). Studies on R&D incentives in principal–agent settings include Piccione and Tan (1996), Cassiman (2000), and Socorro (2007).5 In a model with multiple agents and auctions, Piccione and Tan (1996) examine the effects of R&D competition among agents on the expected production efficiency in the industry. Cassiman (2000) studies the regulator's optimal policy regarding research joint ventures and R&D subsidies and shows that, under asymmetric information, the regulator may allow welfare-reducing joint ventures and block welfare-enhancing joint ventures without R&D subsidies. Socorro (2007) considers optimal monitoring systems in providing R&D incentives to argue that the optimal monitoring strategy requires verification of the agent's R&D effort, but not verification of the R&D result.6 These contributions are quite different from ours. In particular, none of them considers linkages between R&D incentives and wasteful production.7 Also, studies on hidden action followed by hidden information, such as Lewis and Sappington (1997) and Crémer et al. (1998), are related to ours. Lewis and Sappington (1997), for example, show that the optimal output level can be above the first-best when the hidden action problem (combined with the hidden information problem) becomes severe. In that sense, studies on “countervailing incentives” (e.g., Lewis and Sappington, 1989) are related to ours. Similar to countervailing incentives, the supplier's misreporting incentive in our model is “reversed” (i.e., the supplier has an incentive to exaggerate the R&D result without conducting R&D) when the R&D cost is high enough, and making the supplier overproduce his input mitigates such an incentive. In our paper, however, the buyer also activly produces, and thus may want to waste some of the supplier's input. The rest of the paper is organized as follows. The model is presented in Section 2. In Section 3, we set out the buyer's problem. The optimal outcome and resulting waste are discussed in Section 4. We conclude in Section 5. All proofs are relegated to the Appendix.

One of the stated goals in supply-chain management is the reduction in waste.14 Such an objective requires a set of cooperative actions in the supply chain relationship. However, those actions are often not in the best interest of the parties in such a relationship. As this paper shows, eliminating waste may conflict with incentive provision in vertical contracting. Waste may systematically emerge in a supply chain where production of a component is outsourced to the upstream supplier. In particular, when production of the component from the supplier involves process innovation, waste of input may emerge as part of the optimal output schedule when the R&D cost is sufficiently large. We close this paper by briefly discussing the possibility of hiring a third party R&D firm. If the supplier hires the R&D firm, then the resulting distortions in the optimal outcome will be the same as those we have discussed in this paper. If the buyer hires the R&D firm for the supplier, then in the absence of collusion between the supplier and the R&D firm, waste can be prevented. Since the R&D firm will not use the result of R&D that it conducted, hidden action and hidden information problems are completely separated. In such a case, if the supplier also learns the R&D result, then the buyer can achieve the first-best by making the offers to the R&D firm and the supplier also contingent to the other party's report on the R&D result.15 If such contingencies are not possible, then the buyer cannot induce the R&D firm's effort since the R&D result is soft information in our model.