Pricing and inventory decisions in a manufacturer-Stackelberg supply chain with deteriorating items

Abstract

Purpose Integrated decision of pricing and inventory control for a deteriorating product is known as a good practice in revenue management discipline. The purpose of this paper is to formulate the problem of joint pricing and inventory decision in a manufacturer–retailer supply chain with deteriorating items and backlogging. Furthermore, the other purpose is to develop an efficient algorithm to obtain the equilibrium solution. Design/methodology/approach In this study, a manufacturer–retailer supply chain of a deteriorating product is considered. The retailer aims to maximize his profit, for which he jointly determines the retail price and replenishment cycle. In addition, the manufacturer should decide on the wholesale price to maximize her profit. Considering the problem as a manufacturer-Stackelberg game, the equilibrium solution is formulated and analyzed for both the manufacturer and the retailer. Moreover, two different procedures are developed to obtain the equilibrium solution. The first procedure is an exact procedure for the Taylor-approximated model and the second is a simulated annealing (SA)-embedded algorithm for the actual model. Findings It is found that Taylor-approximated procedure is more accurate than SA-embedded procedure. However, the latter is more time-efficient. Moreover, it is observed that the obtained solution is highly sensitive to demand parameters, while it is not the case for the cost parameters. Originality/value The paper models a real industrial problem, and its results could be used in analyzing any manufacturer–retailer supply chain with deteriorating items. Among others, the fruit and vegetable supply chains are more likely to have a similar setting, and this study’s results are applicable for such chains in food industry.

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