Coordination of Pricing and Inventory Decisions in a Fresh-product Supply Chain Considering the Competition between New and Old Products

Abstract

Fresh product retailers often encounter excessive inventory at the end of each period. The leftover product has a lower perceived quality than the new product. Therefore, retailers try to influence consumers’ preferences through price differentiation that leads to an internal competition based on product age and prices. The price differentiation strategy affects the market demands, sales volume and consequently, the profitability of the whole fresh-product Supply Chain (SC) and its members. This paper addresses the pricing and inventory control problem for fresh products to examine the influence of this competition on the SC members’ decisions and profits. Accordingly, a new coordination model based on a return policy with the revenue and cost-sharing contract is developed to improve the profits of independent SC members. The fresh-product SC consists of one supplier and one retailer, where consumers are sensitive to the freshness and retail price of the product. Firstly, the retailer’s optimal decisions, including the order quantity and old product price, are made influenced by a decentralized decision-making structure. Then, a centralized approach to optimization of the SC decisions from the whole SC viewpoint is utilized. Finally, a new coordination contract is designed to motivate the members to participate in the coordination model. Numerical examples are presented to compare the performance of different decision-making approaches. The findings indicated that the proposed contract could effectively coordinate the fresh-product SC. Furthermore, the coordinated decisionmaking model is more profitable and beneficial for the whole SC compared to the decentralized one. The results also showed that when consumers were more sensitive to freshness, the simultaneous sale of multiple-aged products at different prices would be more profitable.