Modelling dynamic freshness-keeping effort over a finite time horizon in a two-echelon online fresh product supply chain

Abstract

A fresh product deteriorates over the finite time horizon and may lose its intended commercial value due to delays in transportation or improper management of temperature in its production and distribution. Seamless collaborations in freshness-keeping actions among supply chain members are critical to ensure that the product is delivered with the desired level of freshness. However, due to concerns about the recovery of the costly investments in the freshness-keeping actions, the members of the supply chain may not fully engage in the actions. In this paper, we propose a dynamic control model comprising an online retailer and an off-line producer, who collaborate to deliver a fresh product to their customers. Having received the orders from its online platform, the retailer will procure the product from the producer, who will be responsible for the delivery of the product to the retailer. The retailer decides the optimal level of advertising effort, while the producer decides the optimal freshness-keeping effort. We show that in decentralized decision mode, the optimal levels of both freshness state and effort decrease significantly because of the shrink in the profit margin. In particular, the producer may abandon the effort and leave the product to deteriorate naturally after the transaction. This will jeopardize the goodwill of the retailer afterwards. To address the issue, we devise a linear-bonus scheme and demonstrate its effectiveness in dynamically motivating an optimal level of the producer’s freshness-keeping effort. Three specific circumstances are identified for setting an appropriate bonus to lead to the highest level of the freshness-keeping effort. Further, we develop a decision matrix for managerial practitioners to choose the appropriate bonus according to particular situations. In addition, the results counter-intuitively show that an increase in the marginal bonus does not necessarily result in a higher level of freshness of the delivered product.