Coordination and Decision of Supply Chain Under: Price-Dependent Demand and Customer Balking Behavior

Coordination and Decision of Supply Chain Under: Price-Dependent Demand and Customer Balking Behavior

Guangdong Liu (Beijing University of Posts and Telecommunications, Beijing, China & Fuyang Normal University, China), Tianjian Yang (Beijing University of Posts and Telecommunications, Beijing, China), Yao Wei (Fuyang Normal University, Fuyang, China) and Xuemei Zhang (Fuyang Normal University, Fuyang, China)
DOI: 10.4018/IJISSCM.2019070102

Abstract

In order to investigate supply chain coordination and decision under customer balking and stochastic demand, the article considers a two-echelon supply chain consisting of one manufacturer with risk-neutral and one retailer with risk-neutral and develops two models in a centralized and a decentralized system and the three contracts are designed to coordinate supply chain and the optimal price and customer balking strategies are obtained. The results show that the revenue and cost-sharing contract can coordinate supply chain under customer balking and price-dependent demand and achieve the Pareto-improvement; the expected sales quantity and expected reduced sales quantity are influenced conversely by the threshold of inventory and probability of a sale under customer balking. In addition, numerical analysis is given to verify the effectiveness of revenue and cost-sharing contract and the paper gives some managerial insights and puts forward to the future work at last.
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1. Introduction

The sales of the retailer can be influenced by not only holding inventory but also adjusting the selling price. For example, the retailer can satisfy customer demand by keeping plentiful inventory, but when the item shortage occurs or the item inventory is under a certain threshold which may lead to the customer decision-making: going out the shop directly or continuing to buy alternatives in the shop, there may be customer balking behavior (Moon & Choi, 1995). The models of inventory and customer balking have been developed by some scholars who have derived lots of different conclusions and insights; On the other hand, the selling price is also the important factor influencing item sales and some scholars have studied the applications of the newsvendor model of price-dependent demand based on different perspectives. Hence, it can be seen that not only should the inventory be considered, but also the selling price should be considered in the case of analyzing market demand. But from the existing literature, it can be found that market demand is influenced by the single factor or two factors in the newsvendor model and customer balking behavior is not considered. In this paper, we will consider the selling price and customer balking simultaneously and study supply chain coordination in the basis of the extensive newsvendor model.

Based on classical newsvendor model (Scarf, 1957; Pasterncak, 1989; Gallego, 1992), many extensive models are developed and applied and many practical problems have been also solved, so it has been gained more and more attentions by the researchers. It is well known that the price is exogenous in the classical newsvendor model, then it is unrealistic in our daily life: It is obvious that the higher selling price will reduce market demand and the lower selling price will promote market demand for the retailer, so how to set the reasonable price to satisfy market demand is one of our attentions in this paper. In addition, the important content of the newsvendor model is how to set the optimal ordering quantity in order to reduce the cost and risk and decrease customer balking behavior for supply chain. Production quantity is the complex decision-making for the manufacturer: production quantity in excess of market demand will lead to the excessive inventory, otherwise there will be out of stock, which brings the uncertain risk to the manufacturer. How to solve the problems above for the manufacturer and the retailer is important for improving the performance of supply chain.

In the paper, we want to coordinate the supply chain considering the extensive newsvendor model under price-dependent demand and customer balking, then there are some questions remain to be answered: 1) Does the extensive newsvendor model remain to be applicable? 2) How to set the reasonable ordering quantity and selling price? 3) How to design the contracts for coordinating the supply chain and improve the profit of supply chain members.

In order to answer the above-mentioned problems, we develop a two-echelon supply chain with price-dependent demand and customer balking behavior, consisting of one manufacturer with risk-neutral and one retailer with risk-neutral, while market demand is stochastic and influenced by the selling price, the ordering quantity and stochastic variable. In this system, first, we formulate two models of centralized and decentralized supply chain and analyze the available conditions of the optimal ordering quantity and optimal selling price. Next, we analyze the effects of parameters of customer balking on the supply chain, the expected sales quantity and the expected reduced sales quantity and optimize the models developed in the paper. Lastly, we analyze three contracts that are used to coordinate supply chain and compare them to obtain the coordination mechanism of supply chain and test the validity of the models by numerical analysis.

The contributions of this paper are as follows: First, we develop the extensive newsvendor model of price-dependent demand and customer balking behavior and obtain the optimal ordering quantity and selling price in the case of certain parameters of customer balking. Second, the model of the expected reduced sales is applied in coordinating supply chain, which has not been analyzed previously. Last, we obtain that the revenue and cost-sharing contract can coordinate supply chain and analyze the effects of parameters of customer balking on supply chain. In addition, we optimize the models for obtaining the optimal solution and summarize some managerial insights.

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