Quick Response Under Strategic Manufacturer

Abstract

Problem Definition: Quick response is a classic operations strategy, under which a retailer can place a second order for rapid replenishment during the selling season after learning more about market demand. This paper examines the value of quick response when a strategic manufacturer can either dynamically charge wholesale prices for different orders or commit to fixed wholesale prices at the beginning. Academic/Practice Relevance: Quick response has been widely viewed as an effective strategy for firms to match supply with demand. In practice, however, a manufacturer may strategically react to a retailer's adoption of quick response. This paper aims to investigate the value of quick response under strategic manufacturer, which has not been explored in the literature. Methodology: We develop a game-theoretic model to analyze the main drivers behind the interaction between the retailer and manufacturer. Results: We find that quick response can harm the retailer and the entire supply chain when demand uncertainty is in a medium range. This is due to the interplay of four different effects that will be delineated in the paper: the risk mitigation effect, the information surplus extraction effect, the strategic inventory effect, and the wholesale pricing flexibility effect. In addition, upfront commitment on wholesale prices does not mitigate the negative effect of quick response, and will even lead to a lose-lose outcome in most situations. Managerial Implications: The above results caution firms to be careful when adopting quick response, especially with strategic manufacturers. This research also characterizes the conditions under which quick response will be valuable, which offers a useful guideline for managers when assessing the quick response strategy.