Financial support to a supplier for quality improvement in a dual-channel supply chain

Outsourcing the production process to suppliers often places product quality beyond the direct control of buyers. While providing financial support to these suppliers can assist in overcoming working capital constraints in quality investments, there remains uncertainty regarding the reliability of suppliers in utilizing such investments for quality improvement. However, few papers have examined how effective the financial support is in encouraging quality investments by unreliable suppliers in a coopetitive context. This paper addresses the research gap by exploring whether a buyer will provide financial support to an unreliable supplier for quality improvement in a dual-channel supply chain. We develop models for cases where the buyer refrains from providing financial support, employs an advance payment scheme, or adopts an investment cost-sharing arrangement. Analysis of the equilibrium outcomes reveals that if the supplier has low working capital, the advance payment scheme benefits both parties; if the working capital is medium, no financial support is provided; otherwise, the investment cost-sharing scheme leads to a mutually beneficial outcome. Moreover, the advance payment (cost-sharing) scheme is more likely to be used when the supplier is perceived as more (less) reliable, the interest rate (cost-sharing ratio) decreases, or channel competition is lessened (intensified). Furthermore, we extend the base model to encompass scenarios where the retail prices are set simultaneously and where the supplier consistently leverages the investment to enhance product quality. We validate that the key findings remain valid in either case. Overall, our findings provide insights for buyers seeking to incentivize capital-constrained suppliers to enhance product quality through financial support in a dual-channel supply chain.