Provide incentives to discourage unethical
behavior. To entice suppliers to
maintain certain mutually agreeable
ethical standards, firms should develop
incentives to discourage unethical
behavior. For example, the DoD would
penalize their vendors for not buying
components from pre-approved
suppliers or for delivering computer
equipment with counterfeit components.
Babich and Tang1 showed that
firms can deter suppliers from product
adulteration if they defer their payment
as follows: pay an upfront deposit
to initiate the production, withhold
the contingent payment, and release
this contingent payment only if no adulteration is discovered by the customers
or government agencies over
a pre-specified duration. The logic
behind this deferred payment mechanism
is simple: it allows manufacturers
to have more time to learn about
suppliers’ product quality by withholding
contingent payments.