A Safety Signaling Game for Small and Medium-sized Manufacturing Enterprises in the Supply Chain

A Safety Signaling Game for Small and Medium-sized Manufacturing Enterprises in the Supply Chain

Qiang Mei (Jiangsu University, Zhenjiang, China), Qiaomei Zhou (Jiangsu University, Zhenjiang, China), Suxia Liu (Jiangsu University, Zhenjiang, China) and Qiwei Wang (Jiangsu University, Zhenjiang, China)
DOI: 10.4018/IJISSCM.2020010106

Abstract

Due to information asymmetry and a prevailing focus on production that ignores safety among small and medium-sized manufacturing enterprises (SMMEs), it is difficult for core enterprises in the supply chain (SC) to establish partnerships with SMMEs that have a high safe production level (SPL). We found that SMMEs would conceal their real SPL when being selected as core enterprise suppliers. This is known as adverse selection. According to the principal-agent theory, we built a signaling model to analyze the conditions of the pooling equilibrium and the separate equilibrium of the signaling game between core enterprises and SMMEs. The equilibrium results showed that adjusting the signal cost parameters of the SMMEs can guide the market to separate equilibrium and stop SMMEs from concealing or exaggerating their SPL. We also discuss corresponding suggestions. This research can reduce SC risks and promote the establishment of sustainable cooperative relationships between core enterprises and SMMEs with high SPLs. This study is applicable globally.
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Introduction

Small and medium-sized manufacturing enterprises (SMMEs) in the supply chain (SC) are the products or service providers of core enterprises, which are related to the continuous and stable operation of the SC. Once an SMME node experiences a security incident, the sustainability of the SC will be adversely affected and the SC risks will be initiated (Raghunath & Devi, 2018). Sustainability has a communicator that extends to other companies in the SC. The core enterprise is the deliberate core communicator of sustainable SC management. Safety production of SC node enterprises guarantees the value creation and business image of all node enterprises. Safety production refers to taking appropriate accident prevention and control measures in order to avoid accidents causing personal injury and property damage during production and business activities, so that the production process is carried out under the conditions stipulated to ensure the employees personal safety and health, make sure that equipment and facilities is free from damage, the environment is protected from damage, and to keep the smooth operation of production activities.

Upstream and downstream enterprises are mutually beneficial stakeholders in the SC. When a certain node enterprise in the SC experiences accidents, the SC is placed at risk, and there is a negative impact on the node’s reputation causing supply interruptions for other enterprises (Tang & Musa, 2011). This is particularly the case for the SC core enterprises. For instance, the incident that prompted the headline, “Workers Sickened at Apple Supplier in China (Barboza, 2011),” became known as the “Poison Apple Incident” in China. This incident had a significant negative impact on the reputation of Apple Inc. SMMEs have a significant impact on the SC (Meqdadi, Johnsen, & Joh, 2012). As suppliers, SMMEs provide semi-finished products or parts for SC core enterprises. SMMEs compose the production and logistics support base of core enterprises, and they also control product cost and quality. SMMEs with low safety production levels (SPLs) affect the reputation and the continuous and stable supply of materials to the SC core enterprises. They can also endanger the performance and efficiency of the whole SC. The modern economic system has transformed SC partners into interest-related stakeholders (Fabian, 2000). Therefore, the cooperation relationship between core enterprises and SMMEs with high SPL should be one that maintains the reputation of the core enterprises, ensures stability in the supply of materials, and promotes the effective operation of the whole SC.

In a two-echelon SC composed of core enterprises and SMMEs, both parties are rational economic entities, and their goals are to maximize their utility. When core enterprises choose SMMEs as suppliers, they have difficulty determining the true SPL of SMMEs. That is, there is asymmetric information between the core enterprise and the SMME. First, the SPL of SMMEs is difficult to measure. Safety performance requires the observation of some variables (Zacharatos, Barling, & Iverson, 2005) (e.g., accident rates, safety organization and management, safety equipment, and safety training (Wu, Chen, & Li, 2008). Core enterprise safety performance data are difficult to collect, and some managers may hide the number of accidents, deaths, and injuries that occur during the production process. Second, core enterprises often have limited resources on SC chain safety management. Core enterprises focus on core competencies and choose to outsource non-core operations to achieve competitive superiority (Kung & Cheng, 2004). Core enterprises lack the capability to investigate the working environment of potential suppliers, the level of their investment in safety equipment, and the treatment of employees including their hours of work. Thus, measuring the SPL of SMMEs is difficult. Moreover, SMMEs often have insufficient safety documentation (Legg et al., 2015), and they tend to take risks. Although their own SPL may not meet the standards of the core enterprise, the SMME will be anxious to secure a cooperation opportunity with a core enterprise. To do so, SMMEs adopt an optimal strategy that may not provide accurate safety production information and that may exaggerate their SPL to provide the core enterprise with false certification of safety production.

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