Channel coordination with price discount mechanism under price‐sensitive market demand

Abstract

This paper considers a two-echelon supply chain with single vendor single buyer for trading a single product. The buyer's demand has been assumed to be price-sensitive. We have assumed three-level inspection at the vendor's end in order to maintain good quality of the items delivered to the buyer. We have developed models for both decentralized and centralized scenarios and have determined the optimal solution using the basic concepts of analytic geometry and algebra. In addition, we have proposed a price discount mechanism, where the vendor has provided discounts on the purchase cost to the buyer against the buyer's (increased) order quantity. Finally, in order to illustrate and validate the proposed model, a numerical example and sensitivity analysis is carried out, which has provided some important managerial implications. It has been observed from the numerical study that the proposed price discount policy coordinates the supply chain and has improved the profitability of the supply chain and its members. considering the entire supply chain's profit. However, it seems hypothetical that only a single decision maker has been handling and managing the entire supply chain efficiently. Therefore, to improve the efficiency of a supply chain, significant coordination is required. Hence, achieving effective coordination between the vendor and the buyer has become an important managerial concern as well as an important research issue. To increase sales volume, the vendor often gives efforts that may influence the buyer's behavior. For example, the vendor may offer various discounts so that the buyer orders more than his economic order quantity, which directly maximizes channel profit. Proper demand analysis is another important aspect of improving supply chain profit. Factors such as price of the commodity, after-sales service, advertisement, and quality of the product have been directly influencing market demand of the product. For example, in the telecommunication sector, Apple is well known for its product quality and high price, whereas Samsung and Lenovo are renowned for their new features at relatively lower prices. Customers who prefer quality over cost will naturally go for Apple's products. Similarly, customers who prefer features and lower prices would prefer Samsung or Lenovo products. Product quality depends on the manufacturer's production processes and also on the raw material quality. Therefore, if the manufacturer wants to produce high-quality products, both manufacturing process and raw material quality play an important role. However, higher quality components may involve higher prices. It is, therefore, necessary to make a balance between price and quality in order to optimize the profit. In this study, we have incorporated price dependency of demand into our supply chain model. The production-delivery supply chain models have often assumed that the quality of product is constantly perfect. However, in practice, this assumption for any production model is rarely satisfied as a production system ofte...

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