A location-inventory-pricing model for a three-level supply chain distribution network

Abstract

This article applies competition-based pricing method to a location-inventory-pricing problem, something which had not yet been investigated as of this study. It reveals that examining the three problems of location, inventory and pricing in an integrated and simultaneous manner can be the best approach to optimize the supply chain (SC) and increase the profitability of its companies. The investigated three-level SC distribution network model includes one supplier, several distribution centers (DCs), and several customers. The model is structured in form of a mixed integer nonlinear programming to maximize the long-term average profit of the distribution network. It considers constraints of inventory capacity along with continuous review inventory policy in each open DC. For its DCs’ retail price determination, two competing pricing approaches of higher than and lower than the average price of competitors have been used. The approach has been investigated on several potential DCs and customers and its numerical results show that retail price from the DCs to the customers is dependent on the average price of the market and its fluctuations. The major finding of this research is the fact that the type of demand function can have a substantial effect on the obtained results in the location-inventory-pricing model and greatly influence the amount of the profit of each company. Its applied strategy along with innovative competition-based pricing approach and projection of customers’ demand via linear and exponential functions show how companies can increase their profit through price adjustment and demand projection.