Pricing and assortment decisions with supply chain integration -

Abstract

Recent research has demonstrated the benefits of “horizontal integration” in retailing by jointly optimizing critical retail decisions on aspects such as assortment planning, pricing, and inventory levels. Another stream of research also demonstrates that “vertical integration”, by accounting for contractual and logistical considerations on the supply side (such as quantity and volume discounts, delay in payment, truck load capacity, etc.), is equally beneficial. However, very limited research has been done on optimizing retail decisions (such as assortment and pricing) while accounting for supply chain considerations. The research in this thesis is along these lines of extended horizontal and vertical integration in retailing. Specifically, we study the effect of quantity discount contracts and truckload shipping costs on a retailer’s joint pricing and assortment decisions for a product line (category) of substitutable retail products. The study is done with a demand model aggregated from consumer preferences, based on a deterministic utility function, and in a one retailer-multiple suppliers setting. In order to gain clear insights, we propose to develop models of different flavors accounting for (i) quantity discount and (ii) truckload capacity. With the deterministic utility model, based on a market with several customer segments having known valuations for the different products in the category, our models are based on mathematical programming, specifically, nonlinear integer programs. These models are typically hard to solve. However, by developing effective linear reformulation schemes, we reduce the computational burden. These schemes reduce the problem to an integer linear program, which can be solved efficiently with many available commercial solvers. The linearized models provide useful managerial insights and practical decision support tools.