Optimal Decisions of the Manufacturer and Distributor in a Fresh Product Supply Chain Involving Long-Distance Transportation

We consider a supply chain in which a distributor procures from a manufacturer a type of fresh product, which has to undergo long distance transportation before reaching the market. In addition to the risk caused by random fluctuations of the market demand, the distributor also faces the risk that the product procured may decay and deteriorate during transportation. The market demand for the product depends on its level of freshness and the distributor’s selling price. The manufacturer has to determine his wholesale price based on its effect on the order quantity of the distributor, whereas the distributor has to determine his order quantity and selling price, based on the wholesale price, the likely loss of the product in long distance transportation, the product’s level of freshness when it reaches the market, and the possible demand for the product. We develop a model to formulate this problem, and derive each party’s optimal decisions in both uncoordinated and coordinated situations. We introduce a new incentive scheme to facilitate the coordination of the two parties, which comprises two parts: (1) the manufacturer offers his wholesale price as a function of the actual transportation time and price discount in the market; and (2) the manufacturer compensates the distributor for any unsold unit of the product. We show that this incentive scheme can induce the distributor to order up to the quantity required to maximize the total benefit of the centralized system, and both parties will all be better off than in the uncoordinated case. Computational studies are also conducted, which reveal some interesting managerial insights.