Perishable material sourcing and final product pricing decisions for two-echelon supply chain under price-sensitive demand

Abstract

This paper considers a single product supply chain involving a producer/processor and a retailer. The producer/processor procures and processes perishable materials such as fruits and milk whose demand are often price-sensitive. We model the dyadic relationship as a Stackelberg game to understand how product perishability and the price-sensitive demand of such products can influence the procurement, production, and sale. The producer/processor is the leader and decides on the processing time of the materials and the wholesale price of the product to maximize profit. The retailer as the follower decides on the sale price of the product and order quantity to maximize profit under a price-sensitive demand setting. Propositions and lemmas for optimality are posed, and the model is validated numerically. Our results suggest that the retailer’s profit cannot be worse than the producer/processor under a price elastic demand. With a high deterioration rate or shrinkage, the producer/processor should improve the storage conditions or processing capacity within certain constraints for better overall supply chain profitability. Finally, both the producer/processor and the retailer need to consider the price sensitivity of consumers when making pricing decisions.