Impact of cost sharing on quality improvement and profits under uncertain demand: The case of a textile and garment supply chain

Abstract

The study explores the strategic pricing and quality improvement decisions under uncertain demand in a three-layer textile and garment supply chain. According to whether the fabric manufacturer (FM) invests in quality or not and whether the garment manufacturer (GM) or garment retailer (GR) is willing to share the costs or not, five game models are constructed to investigate the impact of different members’ cost sharing on the optimal decisions and profits. By conducting a theoretical and numerical analysis, we find that: (1) The GM’s or GR’s cost sharing plays a positive effect on the quality improvement, as for whose cost sharing performs better in improving the quality depending on the proportion of cost sharing, and the quality improvement is highest with both members share the costs simultaneously. (2) The FM receives the highest profit when both members share the costs simultaneously, however, whose cost sharing is more profitable for the FM is also related to the proportion of cost sharing; in short, the FM always benefits from the cost sharing, no matter one member does this or two members do this. (3) The GM (GR) gains the highest profit when only the GR (GM) shares the costs, and the results indicate that if one member has shared the costs, whether the other member engaging in cost sharing could benefit the former depending on their proportions. Specifically, when the GM (GR) chooses to share the costs and the proportion is relatively low, the GR(GM) joining in cost sharing is beneficial to the former; otherwise, is harmful.