Design of Trade Promotion to Maximize Overall Supply Chain Profitability using Mathematical Optimization

Abstract

Manufacturers offer Trade Promotions to retailers with the objective of making their products more accessible to end consumers or reducing the inventory level. There are two broad types of trade promotions - off-invoice and scan-back. Retailers prefer off-invoice promotions, but this often leads to lesser profit for manufacturers because of the forward buying from retailers in the promotion period. Manufacturers prefer scan-back-based promotions. But retailers are not attracted to the simple Scan-back deals due to the risk involved in selling the product to the end consumer in the stipulated promotion period. The proposed model designs a promotional strategy that is acceptable to both parties - manufacturer and retailer. The promotion strategy is designed in such a way that it maximizes the manufacturer's profit while ensuring that the retailer's profit is greater than or equal to the retailer's profit in an off-invoice case. Two approaches are tried out to check the overall profitability of the supply chain: without Inventory cost and with Inventory cost. The system uses the log-log regression model to assess the impact of the product's price and its corresponding demand, thereby providing the price elasticity value, which is one of the essential input parameters. The optimization model is a constrained nonlinear optimization model.