Should a powerful manufacturer collaborate with a risky supplier? Pre-recall vs. post-recall strategies in product harm crisis management.

Product recalls occurring due to quality failures can ravage a firm's reputation. Product quality maintenance is often the responsibility of a manufacturer and its suppliers. Therefore, manufacturer-supplier contracts may lead to efficient quality management. However, numerous recent product recalls showed that a likelihood of a crisis remains despite such supply chain co-operations. Efficient crisis management strategies can mitigate the negative effect of a product recall on firms and consumers. We consider a one-supplier-one-manufacturer supply chain prone to a product recall. Considering a differential game framework, we develop two quality -based cost-sharing contractual models to analyze how, under uncertainty, pre-recall and post-recall strategies of advertising, quality, and pricing vary in the supply chain. Our results indicate that for a high-likelihood/ -impact recall, the supplier and manufacturer focus more on their respective post-recall quality effort than on the pre-recall period. Interestingly, by gradual, incremental pre-recall advertising, the manufacturer raises its goodwill before a recall announcement to keep consumers' higher confidence regarding the product's quality even after the recall. Our cooperative contractual agreements benefit all the channel members and consumers. The manufacturer is always better off by sharing a greater quality effort with the supplier in the post-recall period than in the pre-recall period.