Is dishonesty the best policy? Supplier behaviour in a multi-tier supply chain

In this paper, we examine suppliers׳ dishonest behaviour in a multi-tiered supply chain. In particular, we consider a buyer purchasing a product consisting of two components from a tier-one supplier. The tier-one supplier produces one component in-house and purchases the other component from a tier-two supplier. The suppliers decide their investment in production technology, but the production technologies are imperfect, so the components may be defective. In the unfortunate situation where a defective component is produced, the seller can choose to rework the component to an acceptable standard (honesty) or may ship it without reworking (dishonesty). In turn, the buyer has the option of accepting the product “as is” or may conduct an inspection to identify defective components before accepting the delivery. Our results show that the buyer can benefit from either a high rework cost or when the suppliers׳ negative consequences from cheating are low. We also identify strategy shift-points where the changes in the players׳ tactics lead to rapidly changing outcomes. Finally, we examine the supply chain inefficiencies introduced by the dishonest behaviour of the suppliers.