Model and solution approach to coordinate production-inventory strategies considering nonlinear price-sensitive demand: application to Canadian pulp and paper industry

Abstract

This study addresses a practical problem within a multi-level supply chain where a wide range of customers can be served through different strategies such as make-to-stock, make-to-order, or vendor-managed inventory. The customer demand is stochastic, and sensitive to pricing associated with different production-inventory strategies. We propose a two-stage stochastic mixed-integer non-linear programming model. In the first stage, decisions are made regarding the selection of production-inventory strategies and pricing to maximise the expected profit. The second stage involves decisions related to production, inventory, and distribution, which are used to evaluate the first-stage decisions under various scenarios with different levels of accuracy. To solve the model, a metaheuristic approach based on the Simulated Annealing algorithm is developed. To showcase the practical applicability of our model and solution approach, we use a real case study in a Canadian pulp and paper supply chain. The results revealed that both the production-inventory strategy assigned to customers and the sales price underwent changes across scenarios. Furthermore, we demonstrated that by implementing the SA algorithm, we could improve the initial profit by up to 1.43% through slight adjustments in the sales price and assigned strategies for customers.