A Study Of Incentive Mechanisms For Service Quality Improvement In Decentralized Service Supply Chain

Service supply chains have become a new research topic in the area of supply chain management. Our study on decentralized service supply chains is motivated by the emergence of Internet-based service providers (IBSP). To reduce capital investment and management complexity, these Internet-based service providers often outsource service fulfillment/delivery to local agents/stores, which usually are separate entities with their own interest. Such a decentralized structure is quite common for companies with rapid business expansion. The characteristics of service which are different from that of physical product/inventory make it difficult to monitor and control service quality directly. This issue becomes ever worse if service is fulfilled by another company. Therefore, how to ensure a high level of service quality becomes a major issue for brand owners in decentralized service chains.One way of monitoring service quality is through some imperfect measures such as customer satisfaction– the number of customers who answer"yes"in a post-service satisfaction survey. In this thesis, we will study whether adding incentive on customer satisfaction can improve service quality and the brand owner's expected profit. The service supply chain we study consists of an Internet-based service provider (brand owner), a local service agent and customers. The brand owner maximizes her profits and the local service agent maximizes his expected utility. We formulate a one-period principle-agent model and derive the equilibrium solutions for the cases with and without incentives on customer satisfaction. By comparing the results from the two cases, we find the conditions under which the brand owner should provide the local agent an incentive on customer satisfaction and the magnitude of improvement as a function of input parameters such as measurement variance, service cost, and risk attitude. One concern that may hold on the brand owner from providing local agents rewards for customer satisfaction improvement is the potential increase of her incentive expenses. A major contribution of this research is that we derive the optimal incentive structures under the constraint of total unit incentive limit for the case with custom satisfaction. We show that service quality along with the brand owner's expected profit can be improved by just redistributing a portion of the current incentive on each unit of profit to each unit of increase in customer satisfaction rate. The brand owner's overall incentive expenses need not increase.We extend our model to a two-period model with customer service guarantees, which entitle customers a refund from the brand owner if the service delivered by the local agent fails. In this model, customer satisfaction is a long term effect which affects only the second period's revenue. We find that results are similar to those in the single-period model.