Milking the Quality Test: Improving the Milk Supply Chain Under Competing Collection Intermediaries

• Published in: Management science 2016-05, Vol.62 (5), p.1259-1277
• Main Authors: Mu, Liying, Dawande, Milind, Geng, Xianjun, Mookerjee, Vijay
• Format: Article
• Language: English
• Subjects: adulteration; Competition; Cost analysis; Developing countries; Equilibrium; Farmers; Infrastructure; inspection; Intervention; LDCs; Logistics; Market equilibrium; Milk; milk supply chain; moral hazard; Product quality; Quality management; Supply; Supply chain management; Supply chains
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2015.2171

We examine operational and incentive issues that conspire to reduce the quality of milk—via deliberate adulteration by milk farmers—acquired by competing collection intermediaries in developing countries. Broadly speaking, three main forces in the milk supply chain lead to the low quality of milk: high testing costs, harmful competition among stations, and free-riding among farmers. The goal of this study is to provide recommendations that address the quality problem with minimal testing. Interestingly, some intuitive interventions—such as providing stations with better infrastructure (e.g., storage and refrigeration facilities) or subsidizing testing costs—could hurt the quality of milk in the presence of competition. To save testing costs we utilize mixed testing, where the milk combined from multiple farmers is tested once. However, mixed testing makes the system vulnerable to free-riding among farmers. We counter free-riding by applying a credible threat of individual testing (although not its actual use in equilibrium). We then propose two interventions to combat the harmful competition among stations. The novelty of our proposals lies in utilizing the force of competition to solve a problem created by competition. The incentives in our proposals provide a new tool for the stations to compete and convert the harmful effect of competition (quality reduction) into a beneficial one (quality improvement), resulting in a socially desirable equilibrium outcome: all the farmers provide high-quality milk and each competing station conducts only one mixed test and no further testing. This paper was accepted by Serguei Netessine, operations management .