Abstract: This research investigates supplier channel encroachment strategies under conditions of horizontal and vertical quality differentiation, incorporating product quality design costs. Four Stackelberg supplier encroachment models are proposed: no encroachment, horizontal differentiation encroachment, vertical differentiation encroachment, and combined horizontal and vertical differentiation encroachment. Using inverse solving methods, the equilibrium outcomes and optimal strategies for each participant are analyzed across different scenarios, revealing how product quality design costs affect supplier behavior. Results show that horizontal, vertical, or combined differentiation can be optimal strategies, with suppliers adopting differentiation encroachment only when their direct sales channel profits exceed a threshold. Furthermore, differentiation encroachment is not always the best approach; the choice of strategy depends on the product quality design costs, with suppliers adjusting their strategies accordingly. Under differentiation encroachment, mutually beneficial outcomes for both suppliers and retailers may also be achievable.