Document Type

Article

Publication Date

12-31-2013

Journal / Book Title

Journal of Economics and Economic Education Research

Abstract

This paper looks at the economic behavior of suppliers under different ISO9000 standards, especially that of ISO9001 and ISO9002. Considering the information asymmetry, given the same quality provided, the cost-reducing efforts of the ISO9001 SUPPLIER and ISO9002 SUPPLIER under a fixed, cost-plus contract are investigated. The result shows that the cost-reducing effort of the ISO9002 SUPPLIER is in line with the main manufacturer's expectations while the ISO9001 SUPPLIER is able to keep some of the information rent and exerts less effort. The bargaining power of the ISO9001 SUPPLIER is also stronger relative to that of the ISO9002 SUPPLIER. It is consistent with the degree of information asymmetry residing in the contracting parties. This paper also derives an optimal contract and procurement policy based on a simple institutional setting. The optimal cost-plus contract is obtained and its components are deciphered. The drivers behind the supplier's cost-reducing effort are also studied. Outsourcing is the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. It has been practiced for years, but the recent surge in excitement and growth is likely to result from changes in the competitive marketplace, which force the companies to take a hard look at their core competencies and form a closer alliance with their suppliers to help reduce costs and improve services. Supply chain management, as part of the enterprise resource planning (ERP) paradigm, becomes critical for survival. The success of the Japanese auto makers has generated significant interest for researchers to look into many aspects of the Japanese style of management. On operational side, important concepts in Japanese production system such as kanban system, zero inventory, and just-in-time have been formalized and heavily studied (e.g., Monden, 1983; Hall & Hall, 1984). This development has also ignited research in analyzing the impact of setup cost reduction on production planning (e.g., Porteus, 1985; Zangwill, 1987). When US manufacturers encountered difficulties in implementing kanban or just-in-time system, researchers began to study the behavioral side of the Japanese system, especially corporate culture such as business groups and keiretsu, lifetime employment, and team work (e.g., Hutchins, 1986; Abegglen & Stalk, 1985; Imai, 1986). However, when it comes to one of the building blocks of the Japanese auto industry - the suppliers, the incentive issues as applied to the relationship between the assembler and its suppliers receive little attention. One major reason is that the data itself is difficult to come by. Researchers are not able to get a hold of the details of contract negotiations and the finalized version of the contract itself. Even if they are familiar with the operations, the research methodology used is based on caseby- case, descriptive field study, which is difficult to generalize. Second, even written contracts sometimes are vague. Informal, implicit agreements constitute a large portion of these blackbox elements. Third, most researchers in this area come from disciplines such as operations research, industrial engineering, management science and organizational behavior which usually regard such supplier relationship as being smooth, thereby assuming away the incentive problems. Economists are indeed interested in optimal incentive schemes. However, their derivations are usually done without taking into account what practice dictates, a criticism rightfully advanced by Arrow (1985, 48). Asanuma (1985a, 1989) has conducted extensive field studies in the Japanese auto industry. Three sources of components were identified. They are (1) design approved (DA), where the supplier provides both the manufacturing capability and technical know-how for the design approved by the assembler; (2) design supplied (DS), where the assembler provides the technical drawings and the supplier provides only the manufacturing capability; and (3) off the shelf (OS) for standard components. In the realm of supply chain management, the assembler is most interested in the first two sources, which will be called ISO9001 SUPPLIER and ISO9002 SUPPLIER in this paper for generality. This paper tries to elicit and contrast the cost-reducing efforts of the ISO9002 SUPPLIER and ISO9001 SUPPLIER given a fixed, cost-plus contract. Reducing and controlling operating costs is listed as the top reason companies outsource. As the practice of target costing spreads rapidly, the assembler has every intention of "... transmit[ting] the competitive reality faced by the firm to its suppliers." (Cooper & Slagmulder, 1997, 14) How the suppliers react to the assembler's demand and whether there is any difference among suppliers become interesting issues. In addition, this research derives an optimal contract and procurement policy based on a simple institutional setting in order to address the incentive issues involved in observed Japanese practice of adopting linear contracts (Asanuma, 1985a) in such relationships. The remainder of the paper is organized as follows. The next section provides literature review on related issues. This is followed by an analysis of the supplier behavior given a fixed, cost-plus contract, as well as the derivation of the optimal procurement policy. The last section concludes the paper.

Published Citation

Chang, C. (2013). A theoretical analysis of iso9000 suppliers. Journal of Economics and Economic Education Research, 14(3), 35-52.

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