3. Digitalization, Quality, and Supply Chain Cooperation

This chapter considers a Digital Supply Chain with a single manufacturer and a single retailer, where both advertising and quality contribute to the build-up of the consumers’ goodwill to purchase digital goods. Investments in quality allow the manufacturer to produce and sell smart, connected, and autonomous goods. In a non-cooperative scenario, the retailer controls the price and the advertising while the manufacturer controls the design quality efforts. Although improving quality contributes positively to goodwill, it also increases production costs, resulting in a reduction of the manufacturer’s profit. In a cooperative scenario, the manufacturer supports the retailer’s advertising while abandoning the design quality improvement strategy. Therefore, the manufacturer prefers to invest less in digital supply chain applications and move to traditional cooperation on advertising. We investigate the conditions under which a cooperative program is beneficial when such a trade-off occurs. Our results show that a cooperative program is always successful if operational inefficiency is high. When the operational inefficiency and the quality effectiveness are both low, a cooperative program only benefits the retailer. In the ideal situation of high quality effectiveness and low operational inefficiency, both players prefer to focus on digital transformation tools rather than investing in advertising strategies.