We consider supply chain (SC) contracts in a new setting, the medical equipment industry, where concern for patient benefits is essential and quality efforts are critical for profits compared with supply chains (SCs) in other industries. It remains unclear how quality efforts and patient concern levels affect SC performance and how medical equipment manufacturers’ quality effort levels are linked to their patient concern levels. This study focuses on the impact of a manufacturer’s and a retailer’s patient concern levels on optimal pricing and quality decisions in an SC consisting of a manufacturer facing quality effort-dependent demand and a retailer in the medical equipment industry. We use the Stackelberg game to characterize and determine the optimal operational decisions in five scenarios and address the effects of patient concern levels under above five scenarios. A real case is studied and shows that optimized quality efforts can improve SC profits. The parameters settings are derived from the real data. Our findings bridge the gap between SC quality management and patient benefits and help to understand contract design in relation to patient concerns in different SC structures. This paper is among the earliest to investigate quality efforts for SC contract design in relation to patient concerns and to study SC contract design in the medical equipment industry. Our managerial insights are expected to help manufacturers move toward better quality effort decisions considering patient benefits and are also applicable to other SCs with effort-dependent demand and the effect of altruistic preferences.

Introduction

This research was mainly motivated by quality effort decisions faced by a medical equipment supply chain (SC) comprising a medical equipment manufacturer in Asia and a healthcare equipment retailer in Europe selling products to North America and Europe that provide diagnostic solutions (reagents, instruments, software, etc.) for determining the source of disease and contamination to improve patient health and ensure consumer safety. The products are focused on diagnosing infectious diseases, providing high medical value results for cancer screening, and monitoring cardiovascular emergencies. The medical equipment manufacturer strives to fulfill its Corporate Social Responsibility (CSR) by serving public health, which is critical for all players in healthcare supply chains (SCs). However, the manufacturer’s products have suffered from quality problems, which impacted sales in 2013 and led to recalls in March 2014. Subsequently, the manufacturer invested in product quality, but this came with a tradeoff: too little quality effort decreases patient concern levels, while too much quality effort may hurt profits. Therefore, a critical problem for practitioners in the medical equipment industry is how to determine the optimal quality effort for SCs with patient concerns. The issue of quality goes beyond the medical equipment industry. In 2016, the batteries of Samsung’s Galaxy Note 7 devices exploded in South Korea and other markets. These battery explosions caused significant environmental concerns and evolved into a public safety issue. The above incident affected Samsung’s operations in many countries and resulted in profit reductions. Most of the batteries used in Samsung’s Galaxy Note 7 were made by Samsung SDI, which needed to optimize quality efforts to handle the challenges of financial performance and social concerns.