Maximizing profit in a supply chain by considering advertising and price elasticity of demand

Abstract

A three-level supply chain, including manufacturers, distribution centers and customer zones is assessed in this article. The objective is to maximize the gross profit without violating the operational constraints and capacities of production and inventory. Gross profit is achieved by subtracting costs from the final revenue. Different sources of cost related to raw materials, transportation, production and advertising are addressed. The final demand for a product depends on its price and advertising expenditures. Three solution methods of a mathematical model, a harmony search algorithm and a new combined algorithm of both are proposed for the problem. The mathematical model is of type mixed integer quadratically constrained quadratic programming and its characteristics are analyzed. The experimental results reveal that, statistically speaking, the proposed heuristic algorithms converge into optimal solution with gaps of less than 2 percent. A comprehensive sensitivity analysis is run on price and advertising elasticity coefficients, manufacturers and distribution centers' capacity, base demand and unit transportation cost.