A Two-Stage Manufacturer-Retailer Model with Promotions

Abstract

The basic model presented in this chapter serves to analyze a simple supply chain, consisting of one manufacturer and one retailer. The manufacturer produces one product, which he delivers through a central warehouse to the retailer with a 100% service level. In order to guarantee this service level, the manufacturer has to hold as much inventory as the retailer will order. This may differ depending on the retailers’ promotional activities. In a worst case scenario the manufacturer has to assume that the retailer offers promotions every period, thus the manufacturer has to hold inventory accordingly. If the retailer informs the manufacturer in advance about his promotional activities, the manufacturer can adjust his inventory accordingly and achieve lower inventory holding costs. The retailer faces normally distributed market demand from two different customer segments: loyal customers, who purchase product every period and walking customers, who purchase product only if it is offered on promotion.