Pricing and lot sizing optimization in a two-echelon supply chain with a constrained Logit demand function

Abstract

Decision making in supply chains is influenced by demand variations, and hence sales, purchase orders and inventory levels are therefore concerned. This paper presents a non-linear optimization model for a two-echelon supply chain, for a unique product. In addition, the model includes the consumers’ maximum willingness to pay, taking socioeconomic differences into account. To do so, the constrained multinomial logit for discrete choices is used to estimate demand levels. Then, a metaheuristic approach based on particle swarm optimization is proposed to determine the optimal product sales price and inventory coordination variables. To validate the proposed model, a supply chain of a technological product was chosen and three scenarios are analyzed: discounts, demand segmentation and demand overestimation. Results are analyzed on the basis of profits, lotsizing and inventory turnover and market share. It can be concluded that the maximum willingness to pay must be taken into consideration, otherwise fictitious profits may mislead decision making, and although the market share would seem to improve, overall profits are not in fact necessarily better.

Keywords

• Constrained multinomial logit
• Pricing
• Lotsizing
• Supply chain optimization
• PSO