Joint optimization of product design and manufacturing inventory in a C2M supply chain

Abstract

Motivated by the prevalence of Consumer-to-Manufacturer (C2M) programs in retail platforms, this study considers a Vendor Managed Inventory (VMI) supply chain system, consisting of a retail platform and a manufacturer, which designs and sells a new product to a market of customers. Particularly, the manufacturer’s design of the product’s attributes would affect the conversion rate of the customers who click the web links to the product, and customer demand for the product eventually. The manufacturer jointly plans the product design and inventory control in this model. By exploring the model, we demonstrate that the manufacturer makes inventory decisions following a modified base-stock policy dependent on the conversion rate, and adjusts the product design as the inventory cost rate increases. Furthermore, we find the manufacturer’s separate plan of product design and inventory control harms the manufacturer but can benefit the retail platform and the entire supply chain. This finding can explain why the manufacturer’s separate plan is a widely observed phenomenon in practical C2M programs. We further propose a hybrid contracting scheme, which combines quantity discount and cost sharing contracts, to coordinate the supply chain system. Two-fold extensions of the main model, heterogeneous customer valuation and dynamic product design, have also been considered.