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Price promotions, operations cost, and profit in a two-stage supply chain

  • Su, Yiqiang
  • Geunes, Joseph
Registered author(s):

    The phenomenon in which demand variability increases as one moves upstream in the supply chain has been often observed in practice. This so-called “bullwhip effect” often increases upstream operations costs, including inventory holding and transportation costs. Price variations are considered to be one of the primary causes of the bullwhip effect, and thus everyday low price (EDLP) strategies are commonly recommended to counter the negative impacts of the bullwhip effect. However, trade promotions continue to play an important role in the U.S. supermarket industry as well as other industries. This paper investigates this apparent inconsistency between the literature and practice by employing a deterministic, two-stage supply chain model composed of a single supplier and a single retailer. We demonstrate that even though the use of trade promotions can indeed increase a retailer's and supplier's operations costs, these costs may be more than offset by increased revenues, even in the absence of explicit coordination. That is, if the supplier judiciously applies a trade promotion strategy and the retailer passes some of this discount to its customers, then under certain conditions, the resulting supply chain profit can exceed that under an EDLP strategy. We provide a broad set of computational results that validate this conclusion and discuss the resulting managerial insights.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0305048312000217
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    Article provided by Elsevier in its journal Omega.

    Volume (Year): 40 (2012)
    Issue (Month): 6 ()
    Pages: 891-905

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    Handle: RePEc:eee:jomega:v:40:y:2012:i:6:p:891-905
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    1. David R. Bell & James M. Lattin, 1998. "Shopping Behavior and Consumer Preference for Store Price Format: Why “Large Basket” Shoppers Prefer EDLP," Marketing Science, INFORMS, vol. 17(1), pages 66-88.
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    10. Frank Chen & Zvi Drezner & Jennifer K. Ryan & David Simchi-Levi, 2000. "Quantifying the Bullwhip Effect in a Simple Supply Chain: The Impact of Forecasting, Lead Times, and Information," Management Science, INFORMS, vol. 46(3), pages 436-443, March.
    11. Arcelus, F. J. & Shah, Nita H. & Srinivasan, G., 2001. "Retailer's response to special sales: price discount vs. trade credit," Omega, Elsevier, vol. 29(5), pages 417-428, October.
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    14. Ardalan, Alireza, 1994. "Optimal prices and order quantities when temporary price discounts result in increase in demand," European Journal of Operational Research, Elsevier, vol. 72(1), pages 52-61, January.
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