Values of Traceability in Supply Chains

Problem definition: We study how traceability can impact quality contracting under different supply chain structures. Academic/practical relevance: The recent development in blockchain technologies has enabled end-to-end traceability of supply chains. When a product failure occurs, such traceability information can be used to identify the suppliers at fault. Methodology: We use game theory to study the contracting equilibrium between one buyer and two suppliers. Results: In serial supply chains where each supplier belongs to a different tier of the supply chain, the sequential production process leads to a double moral hazard problem between the upstream and downstream suppliers, so that the upstream supplier is less incentivized and product quality is reduced. In this case, the ability to trace the production process improves efficiency by mitigating the double moral hazard. As a result, in serial supply chains, traceability always improves product quality and all firms' profits and naturally creates a win-win situation. In parallel supply chains where all suppliers belong to the same tier of the supply chain, the buyer may have to recall all products from the market once a defect occurs if he cannot trace which products were produced by the defective and non-defective suppliers. In this case, in addition to the improved efficiency due to the mitigated moral hazard, the ability to trace the product origin also impacts the supply chain by enabling flexibility in product recall, which can in fact reduce product quality. Furthermore, in parallel supply chains, while traceability always improves the buyer's profit and the total supply chain profit, it can reduce the suppliers' profits. Managerial implications: The impact of traceability critically depends on the supply chain structure. Blockchain-enabled traceability may be easier to gain traction in ``long" multi-tier supply chains as opposed to ``flat" multi-sourcing supply chains.