The Impact of a Buyer's Incentives and Organizational Structure on Suppliers' Quality

ABSTRACT Changes in a buyer organization's incentives and structure can have a significant impact on supply chain performance, such as the quality of sourced components. We examine this relationship using data from a unique quasi‐experiment where one of the two plants of a buyer introduced long‐term quality improvement incentives and a more organic structure for supply chain engineers, while the other plant did not. Analyzing longitudinal component quality data from suppliers to both plants using difference‐in‐differences and triple‐differences methods, we find that (i) the changes in incentives and structure led to differential improvements in supplier quality across the two plants, and (ii) suppliers did not easily transfer quality knowledge gained from one buyer relationship to others. Our paper contributes by showing that organizational redesign by a buyer focused on implicit incentives along with a supportive organic organizational structure can create a learning environment at its suppliers that can help improve the quality of sourced components and the learning generated does not necessarily spill over to other buyers.