A Stochastic Programming with Recourse Model for Supply Chain and Marketing Planning of Short Life Cycle Products

Abstract

A firm that deals with a short life-cycle product needs to make strategic supply chain decisions such as capacity planning and initial marketing decisions such as advertising well in advance under uncertain future demand. The firm initially can only generate a set of demand scenarios and provide a realistic assessment of the demand only after observing actual demand during the initial periods. In this paper, we provide an integrated marketing and supply chain framework and suggest the use of a two stage stochastic programming with recourse to analyze this situation. The original model is a stochastic non linear model with integer constraints, which is extremely difficult to solve. So, we suggest an innovative approach to convert it to a linear mixed integer stochastic program. In the numerical study, we discuss in detail the behavior of optimal pricing and advertising policies in the presence of a supply constraint and the benefits of including stochsticity and marketing decisions that can shape the demand process while planning for the new products.