Integrated pricing and lot-sizing decisions in a serial supply chain

Abstract

• We consider a serial supply chain with multiple suppliers and price sensitive demand. • The objective is to maximize profit and determine order quantities for selected suppliers. • This integrated process is modelled as a mixed integer nonlinear program. • A different multiplicative factor is assigned to each supplier. • We propose a power-of-two heuristic algorithm that generates near optimal solutions. In this article, we consider a serial supply chain controlled by a decision-maker who is responsible for deciding the amount of raw material to order from the selected suppliers, the amount of product to transfer between consecutive stages in order to avoid any inventory shortages, and the final product's selling price so that the profit per time unit is maximized. Coordinating all these decisions simultaneously is a topic that has been neglected in literature. This integrated process is modeled as a mixed-integer nonlinear programming model. In addition, the model requires the order quantity received from each selected supplier to be an integer multiple of the order quantity delivered to the following stage, which means that a different multiplicative factor can be assigned to each supplier. This coordination mechanism shows an improvement in the objective function compared to existing models that assign the same multiplicative factor to each selected supplier. Moreover, we develop a heuristic algorithm that generates near optimal solutions in a timely manner. Two numerical examples are presented to illustrate the proposed model and the heuristic algorithm.