Effects of Quick Response and Market Uncertainty on Product Quality and Firm Profitability

94 Pages Posted: 10 Jan 2019 Last revised: 2 Aug 2019

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Lin Tian

Fudan University, School of Management

Date Written: Aoril 30, 2019

Abstract

In many supply chains, the brand-owning retailer designs product quality and decides the retail price, but often outsources its production to suppliers. For products with a short selling season, low quick-response capability in the supply chain requires the supplier to carry out the production before the selling season, but the uncertain market demand creates risks of stock-out or excess inventory. This paper studies the impacts of the supplier’s quick-response capability and demand uncertainty on product quality and firm profitability under pull contracts in the supply chain. We find that an increase in the supplier’s quick-response capability can lead to higher or lower equilibrium product quality, benefiting the retailer but potentially reducing the supplier’s profit. Our analysis suggests that the supplier can have incentives to keep secret its improvement in process efficiency or quick-response capability to mitigate the retailer’s strategic behavior. Interestingly, both the retailer and the supplier can be worse off with a higher probability for high market state (with more high-valuation consumers). Further, a higher probability of the high market state can lead to lower product quality.

Keywords: marketing-operations interface, pricing, quick response, product quality, pull contract, demand uncertainty, channel, supply chain, outsourcing

JEL Classification: D40, D42, D80

Suggested Citation

Jiang, Baojun and Tian, Lin, Effects of Quick Response and Market Uncertainty on Product Quality and Firm Profitability (Aoril 30, 2019). Available at SSRN: https://ssrn.com/abstract=3308215 or http://dx.doi.org/10.2139/ssrn.3308215

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Lin Tian

Fudan University, School of Management ( email )

670 Guoshun Road, Yangpu District
Shanghai, 200433
China

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