Early Supplier Involvement in New Product Development under Moral and Technological Uncertainty

Abstract

Over the past few decades, technology firms involve their suppliers in the new product development process, aiming to achieve cost and time reduction and efficiency improvement. Successful early supplier involvement (ESI) can be beneficial for technology firms, while the moral and technological uncertainty of suppliers can negatively affect the outcomes of new product development (NPD) as well. In this context, we study a two-echelon supply chain composed of a material supplier providing specific components of the new product and a technology firm. A literature review in terms of ESI in NPD process, supplier uncertainty, and the incentive mechanism for supply chain collaboration is provided. We consider two types of suppliers, faithful supplier who exerts sufficient effort to develop the specific components to the quality required by the technology firm and unfaithful supplier who is reluctant to invest sufficient time, investment, and efforts to satisfy the quality requirement of the technology firm. In this paper, given the supplier’s moral and technological uncertainty, we provide a three-stage analytical model to explore how technology firms should make decisions about the supplier’s involvement level and the pricing strategy of the new product. The results show that the retail price and wholesale price of low-quality products increase with suppliers’ moral uncertainty. With high moral uncertainty of suppliers, the retail price and wholesale price of low-quality products increase with suppliers’ technological uncertainty; with low moral uncertainty of suppliers, the prices of low-quality products decrease with suppliers’ technological uncertainty. Furthermore, the involvement level decreases with suppliers’ moral uncertainty and technological uncertainty. We also examine the effects of two incentive mechanisms, including penalty contract and revenue sharing contract, on motivating the supplier to participate in new product development faithfully. The result shows that the penalty contract is more favorable to the technology firm than the revenue sharing contract.