Two essays on quality management

Abstract

The practice of outsourcing enhances production efficiency and lowers production costs, but it also increases the risk of defective products and/or inferior services, which in turn can damage the brand image of products. As a result, managing product-harm crises and/or service quality has become an important function of product/service quality management. This thesis aims to investigate two approaches—presented in two separate studies—on managing quality issues. The first study focuses on product recall, which is an ex post remedy in managing defective products that have already been sold to consumers. Although consumers expect on-time recalls for product defects, anecdotal examples suggest that firms may severely delay their recall decisions. We study the recall timing decision for a profit-maximizing manufacturer by incorporating a Bass-diffusion model to capture sales patterns for products with long life cycles. Our theoretical model reveals three main results. First, a product recall has a negative impact on product sales, especially when the recall is initiated at an early stage of a product cycle. Second, a firm might use a delayed recall, by delaying a recall to long after an investigation ends and/or by manipulating the necessary duration of investigation, to mitigate this negative impact. We show that a firm with a high margin-to recall-cost ratio is more likely to have a (long) delayed recall than a firm with a low one. Both results are further supported by our case study in which we use the U.S. automobile industry data and NHTSA recall data from 2012-2015. Finally, we show that different penalty schemes, such as duration-dependent or lump-sum penalties, have differential effects in deterring delay duration (after an investigation) and investigation duration manipulation. The second study analyzes how franchising companies use a self-enforcing mechanism to solve a free-riding problem (quality violation problem) among franchisees and meanwhile avoid an opportunistic termination by the franchisor, i.e., a two-sided opportunistic problem. We find that an initial investment with an associate ownership arrangement, that is, franchise arrangement, is an ideal hostage (“ugly princess) for suppressing two-sided opportunistic behavior and it can help protect brand image and sustain a long-term healthy franchise relationship. By incorporating self-enforcement into contract design for franchising companies, we can further explain different governance structures observed in franchising, and provide policy guidelines to courts for designing legal constraints on franchise termination that can better solve the two-sided opportunistic problem. The two studies provide new insight on managing quality issues by taking into account opportunistic behavior within a firm. By better understanding how firms and agents make decisions on the process of quality control/management, we can provide guidance for the firm/government to protect brand image and consumer safety.