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Quality decision in a make-to-order supply chain with uncertain demand

In this paper, we investigate the quality decision of a make-to-order (MTO) supply chain, where there may be different strategies between players. Before and after orders are placed in the market, the quality of the raw materials and the price of the products are set by the supplier and the manufacturer, respectively and production takes place. Due to the volatility of demand, the players are subject to financial risk. In contrast to the general assumption that players in a supply chain are risk neutral in quality decision, we consider the risk tolerance of the players. On the basis of preference theory, we use a certainty equivalent to represent the utility of an individual. Under three different supply chain strategies including Vertical Integration (VI), Manufacturer's Stackelberg (MS) and Supplier's Stackelberg (SS), we derive the utility of the players. The study provides valuable insights into the impact of supply chain strategies and risk tolerance on quality investment. Compared with a risk-neutral supply chain, a risk-averse supply chain provides lower, equivalent and higher quality of products in VI, MS and SS, respectively.