Selling directly to customers represents an opportunity for suppliers, but it can threaten retailers’ profits. This is known as supplier encroachment, and it occurs across a range of industries. In an innovative study, HKUST’s Professor Ying-Ju Chen and co-researchers modeled scenarios in which retailers can optimize the outcomes of supplier encroachment. They show how retailers can strategically share consumer demand information with suppliers to create a “win–win” situation for both.

Although selling straight to consumers can benefit suppliers, it may be costly to establish a direct selling channel. “As such,” the researchers tell us, “whether a supplier should encroach becomes a prudent decision that depends on the ease of encroachment and the supplier’s familiarity with the end market.” In practice, the supplier rarely has access to demand information, due to the remoteness of the market. One solution is to rely on retailers, who are closer to consumers, for the all-important market data.

Understandably, however, retailers are usually reluctant to share what they know. “There is a concern that if the retailer shares private demand information, the supplier will strategically utilize the information to improve his pricing and marketing strategies,” the researchers explain. This may reduce the retailer’s own profit margin.

Although such information sharing is commonly assumed to be detrimental, the researchers hoped to identify situations in which sharing demand information benefits retailers and suppliers alike. With this in mind, they developed computational models in which “a supplier sells products to end consumers via an independent retailer” and “also has an option to establish a direct selling channel to sell substitute products directly to end consumers.”

Withholding demand information did effectively deter supplier encroachment, but only at extreme values of entry costs. The researchers discovered that “when the entry cost is either high or low, the supplier’s encroachment decision is independent of the retailer’s commitment to share information.” Although probably detrimental to retailers, supplier encroachment at low entry costs actually benefits the entire supply chain, as it allows firms “to extract more surplus from consumers.” When entry costs are very high, however, the retailer should no longer share demand information.

The results for mid-range supplier entry costs were particularly interesting. In such cases, the researchers report, “the retailer’s best option is to share her private demand information with the supplier to conditionally alter the supplier’s encroachment decision.” In other words, sharing consumer demand information is a win–win for the retailer and supplier when entry costs are middling.

For retailers facing the threat of supplier encroachment, these insights could mean the difference between victory and defeat in competition for customer demand. In other cases, say the researchers, a mutual victory can be achieved: “the retailer, the supplier and the supply chain all benefit from the retailer’s information sharing.” The findings of this study are relevant to all industries in which supplier encroachment occurs, from electronics to fashion and air travel.