How to Escape Supply Chain Dilemmas? Manufacturer Encroachment and Supplier Cost-Reduction Investment

Component suppliers and manufacturers in a supply chain have long faced different dilemmas. The component supplier intends to adopt new technologies to reduce production costs, but the new technologies usually require significant investment costs. The encroachment into retailing can bring more revenue to manufacturers, but the significant costs of establishing and maintaining direct channels and the potential conflicting interests with the retailer might discourage the manufacturer’s encroachment. This study aims to address these dilemmas facing the component supplier and manufacturer by investigating an interesting scenario in which they both can obtain benefits. Within the given context, the manufacturer’s encroachment increases the order of the components, which motivates the supplier to make more technological investments to reduce production costs. The reduction of component costs enables suppliers and manufacturers to reduce the wholesale prices of components and final products. In this case, the manufacturer’s encroachment can benefit both the manufacturer and the retailer. This study is one of the first to investigate how the interaction between the manufacturer and supplier helps solve their respective dilemmas and provide benefits to the whole supply chain. Additionally, we extend the literature on manufacturer encroachment on retailers by considering supplier investment in cost-reduction production.