Maximizing middlemen’s profit through a two-stage ordering strategy

Abstract

In the era of e-commerce, middlemen serve as distributors that purchase wholesale products from suppliers and sell them to retailers. Middlemen have additional functions such as facilitating import and export, interacting with supply chain participants, playing a crucial role in connecting production to customer demand, and coordinating a supplier-middleman-retailer three-level supply chain. This study proposes a two-stage ordering strategy for the middleman to earn higher profits, compared to a single-stage ordering strategy, in a three-level supply chain. We introduce a heuristic solution methodology to find the optimal order quantity of multiple products for both the initial ordering and the follow-up ordering period that maximizes the middleman’s profit. Furthermore, we examine the influence of diverse costs including sourcing, stockout, and ordering costs, as well as minimum order quantity contract and demand variance on the middleman’s order quantity and profits. We found that these costs do not affect the total order quantity. However, they strongly affect the split between the initial and follow-up order quantities. In two-stage ordering system, a higher demand variance does not lead to significant profit reduction for middlemen. Our study provides an approach of using a two-stage ordering strategy for middlemen to increase their profits and mitigate the price and demand risks.