Quality Improvements in Supply Chains and Impact on Shelf Space Allocations

This paper considers a supply chain system with two competing manufacturers and a single retailer. Each manufacturer produces only one product. These two products are close substitutable. The market demand of each product is based on the difference of quality levels of products and shelf space of each product. The analysis shows that the retailer's optimal strategy for shelf space allocation satisfies that the ratio of products' respective shelf space is equal to the ratio of products' revenues. We study three scenarios in the supply chain. In the scenario of no quality improvement, we investigate relations of shelf spaces and market demands with the intrinsic demands, margin profits and elasticity of shelf space. In the scenario of one-side quality improvement, we show that, as the intrinsic demand increases, both the optimal levels of quality improvement and the corresponding shelf space increase. In the scenario of simultaneous quality improvement, the main results indicate that, as the responsiveness of market demand to the difference of quality levels or the elasticity of shelf space increases, the intensity of quality competition increases and the manufacturers adopt higher quality levels. The retailer and the manufacturer with a cost advantage in quality improvement will benefit from quality competition, however, the manufacturer with a cost disadvantage in quality improvement and the whole supply chain will lose. The consumers always benefit from quality competition.