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ISSN : 1598-7248 (Print)
ISSN : 2234-6473 (Online)
Industrial Engineering & Management Systems Vol.8 No.1 pp.1-13
DOI :

A Coordinated Planning Model with Price-Dependent Demand

1Nagendra N. Nagarur†, 2Wipanan Iaprasert
1Systems Science and Industrial Engineering Department Watson School of Engineering andComputer Science Binghamton University
2Asian Institute of Technology
Received July 1 2008/Accepted July 8 2008

Abstract

This paper presents a coordinated planning model of price-dependent demand for a singlemanufacturer and a single-retailer. The demand is assumed to be normally distributed, with its mean being price dependent. The manufacturer and retailer coordinate with each other to jointly and simultaneously determine the retail selling price and the retailer order quantity to maximize the joint expected total profit. This model is thencompared to a ‘returns’ policy model where manufacturer buys back unsold items from the retailers. It is shown that the optimal total profit is higher for coordinated planning model than that for the returns policy model, in which the retail price is set by the retailer. A compensation or profit sharing scheme is then suggested and it is shown that the coordinated model with profit sharing yields a ‘win-win’ situation. Numerical results are presented to illustrate the profit patterns for both linear and nonlinear demand functions. The coordinated planning model, in addition, has a lower optimal price than for a returns policy model, which would result in higher sales, thus expanding the markets for the whole supply chain.

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