Close integration of pricing and supply chain decisions has strategic as well as operations level benefits

Abstract

Supply chain decision-making processes that are not tightly integrated with marketing decisions may well be costing the firm twice. First, this will promote poor operations level decisions and second, this may provide management with a view of their firm that will lead to inappropriate strategic decisions. The motivation of this paper is to explore the relationships between decision-making at various levels within the firm and, in particular, the relationship between the firm’s strategic and operations decision making. Using the case of a manufacturer managing a supply chain we show that increasing revenues may not increase profits and cutting costs may also reduce profits. We also show that the strategic or tactical view of the firm, and consequently the quality of the firm’s strategic and tactical decisions, can be highly dependent on how the firm makes low-level marketing and supply chain decisions. Our results illustrate the significant benefit available to manufacturers who can successfully and tightly integrate production, logistics, and marketing decision making. Such integration will improve operations level decisions and also provide an improved platform for tactical and strategic decisions.

Appendix

1.1 Proof of result 1

From (2) we construct the Lagrangian:

$$\begin{aligned} \textit{RV}={\sum }_{j=1}^N {P_{\!j} (a_j -b_j P_{\!j} )} +\lambda \left[ \sum _{j=1}^N (a_j -b_j P_{\!j} ) -Q\right] \end{aligned}$$

The first order conditions for a maximum with respect to $P_{j}$ are:

$$\begin{aligned} \frac{\partial \textit{RV}}{\partial P_{\!j} }=0\hbox { gives: }P_j =\frac{a_j }{2b_{\!j}}-\frac{\lambda }{2}. \end{aligned}$$

To find $\lambda$ we note that ${\sum }_{j=1}^N {(a_j-b_j P_j)}=Q$ hence:

$$\begin{aligned} {\sum }_{j=1}^N {(a_j+\lambda b_j)}=2Q. \end{aligned}$$

Writing ${\sum }_{j=1}^N {a_j=A}$ and ${\sum }_{j=1}^N {b_j=B}$, then $A+\lambda B=2Q\hbox { or }\lambda =(2Q-A)/B$, which lead to

$$\begin{aligned} P_j^{*}=\frac{a_j }{2b_j}-\frac{Q}{B}+\frac{A}{2B} \end{aligned}$$