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

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  • Su, Yiqiang
  • Geunes, Joseph

Abstract

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.

Suggested Citation

  • Su, Yiqiang & Geunes, Joseph, 2012. "Price promotions, operations cost, and profit in a two-stage supply chain," Omega, Elsevier, vol. 40(6), pages 891-905.
  • Handle: RePEc:eee:jomega:v:40:y:2012:i:6:p:891-905
    DOI: 10.1016/j.omega.2012.01.010
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    References listed on IDEAS

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    Cited by:

    1. Tsao, Yu-Chung & Lu, Jye-Chyi, 2016. "Trade promotion policies in manufacturer-retailer supply chains," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 96(C), pages 20-39.
    2. Zhen, Lu, 2014. "A three-stage optimization model for production and outsourcing under China’s export-oriented tax policies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 69(C), pages 1-20.
    3. Wang, Xun & Disney, Stephen M., 2016. "The bullwhip effect: Progress, trends and directions," European Journal of Operational Research, Elsevier, vol. 250(3), pages 691-701.

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    Keywords

    Inventory control; Operations management;

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