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

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.