Pricing and inventory decisions in a dual-channel supply chain with learning and forgetting

Abstract

The purpose of this paper is to investigate the effects of learning and forgetting on a vendor’s production processes in a two-level dual-channel supply chain. The vendor sells a standard product through a brick-and-mortar store, while maintaining an online store that sells the standard product alongside a core-customizable item. The standard product is expensive to purchase and stock by the retailer, making a vendor-managed inventory with consignment stock agreement suitable for the supply chain. This paper uses a mathematical-modeling methodology, where a channel structure can adopt five inventory policies reflecting different production and shipping scenarios affected by learning and forgetting. Those policies are compared to a benchmark policy that ignores learning and forgetting effects. The demand functions of the standard and customized products depend on price, cross-price, and delivery lead-time, and these functions affect one another. The objective, therefore, is to determine the optimal joint pricing and inventory policies that maximize the profit of the supply chain. Numerical examples and sensitivity analyses are used to illustrate the behavior of the developed models. A numerical search technique was used to find the optimal solutions, which were also supported by some analytical results. The main findings of the paper highlight the potential performance advantage of the dual-channel strategy, and they show that both the vendor and the retailer benefit from learning. They also suggest that learning, despite being impeded by forgetting, reduces inventory-related costs, thereby allowing the chain to reduce the prices of its product(s), which increases demand and subsequent sales.