James B. Daia, Lei Fana, Neville K.S. Leeb and Jianbin Lic∗
(戴宾、范雷、李家硕、李建斌)
a Economics and Management School, Wuhan University, Wuhan, P.R. China; bDepartment of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Kowloon, Hong Kong; cSchool of Management, Huazhong University of Science and Technology, Wuhan, P.R. China
Tracking systems have been widely used to resolve the issues of product recall and food safety. Thus far, few researches have been done on designing the tracking capability from the perspective of supply chain. In this paper, using the traceable unit size at the manufacturer level to measure the tracking capability, we propose a non-convex non-linear programming to jointly optimise the tracking capability and price considering the tracking cost and recall cost in a supply chain with endogenous pricing. Results show that, in both centralised and decentralised supply chains, there is a unique tracking capability and retailing/wholesale price with closed-form solutions to optimise the supply chain profit. When the cost ratio (unit tracking cost/unit recall cost) is sufficiently large and small, the optimal tracking strategy is barcode tracking and unit tracking, respectively, and otherwise, the optimal tracking strategy is batch tracking with an economic traceable unit size which depends on the cost ratio, quality inspection threshold, supply defection rate and the supplier’s tracking capability. Furthermore, in the context of large and small cost ratio, we find that improving tracking capability will enlarge and mitigate the effect of double marginalisation, respectively. In particular, we find that the strict tracking regulation policy is more robust than the subsidy policy to improve the supply chain tracking capability.
Keywords: design; optimisation; pricing theory; tracking capability; product recall
1. Introduction
As companies have increased global supply chains at the cost of product reliability to retain competitiveness, product recall is becoming a fairly challenging issue in supply chain management, particularly in the food and pharmaceutical supply chains. In 1997, Hudson Foods recalled 25 million pounds of beef products due to bacterial contamination, which is the largest ground beef recall in US history (Loader and Hobbs 1999). In the early 2000s, the drug manufacturer, Merck (MRK) recalled arthritis medication Vioxx due to increased risk of heart attacks, which cost Merck $4.85 billion in settled claims and lawsuits. On 30 April 2010, a subsidiary of Johnson & Johnson, McNeil Consumer Healthcare, announced recalls of 43 over-the-counter children’s medicines in 12 countries (ALJAZEERA 2015). In 2014, the US Consumer Product Safety Commission announced 313 recalls of toys, furniture, fitness equipment and baby food makers. From 2007 to 2014, Mattel announced 33 recalls of toys and games due to high lead levels and possibility of causing choking and other hazards. These aforementioned recalls not only damage the company’s reputation, but also incur significant financial loss, such as the cost of replacing and fixing defective products.