Incentive Mechanisms for Supplier Development in Mega Construction Projects

Supplier development (SD) has become an emerging supply chain management practice for firms focusing on their core strategic advantages by outsourcing a significant portion of production or construction activities. Various incentive mechanisms are available for suppliers to improve their capabilities to meet owners' expectations. However, a comparative analysis is needed to understand how successful they are. This paper investigates the incentive mechanisms for SD in a construction supply chain that consists of one owner and one supplier. Considering the owner's dominant position in the negotiation of a supply contract, a principal-agent model with the objective of optimizing the owner's profit and a Stackelberg game model designed to optimize the profits of both the owner and supplier are proposed and analyzed. Two commonly used incentive methods, including purchase price incentive and cost sharing, are analyzed and compared. The analysis and comparison are illustrated by a numerical example. The primary contribution of this paper is the analysis of the impact of incentive methods on quality improvement for the supplier and a sensitivity analysis of the supplier's internal and external factors, such as purchase quantity, market demand, and manufacturing cost structures, which are useful managerial insights for SD practices in mega construction projects.

I. Introduction

Industrialization has enabled the construction industry to attain improved cost efficiency, productivity, and quality. Standardized and modular designs, mass customization of prefabricated components in off-site factories, and assembly at construction sites are the most commonly applied industrial practices in the construction industry [1]. To maintain better quality control, it is very common that in mega projects, the owner engages only one supplier to provide all the prefabricated components needed in the project (or subproject). For this reason, we focus our study on analyzing how various incentive mechanisms impact the supplier's quality improvement in meeting the owner's expectations. In addition, we select the Hong Kong–Zhuhai–Macao Bridge (hereinafter referred to as HZMB) [2], which is currently under construction, as a case study to illustrate the developed methodology, as some of us are involved in the project as consultants. The main part of the HZMB project adopts a scheme using a steel box girder bridge and tunnel combination. Both are constructed by assembling off-shore prefabricated elements manufactured by the suppliers. The steel box girder bridge section is divided into three steel box girder packages, with one supplier responsible for the supply of one package [3]. Developing adequate incentive mechanisms to encourage the supplier to maintain the highest quality of products while minimizing the cost has been a major challenge of the owner in this project. This prompted us to investigate the supplier-development (SD) program.