A multi-period inventory allocation model using price protection and product return subsidies for supply chains having independent distributors under declining price environments

• Main Author: Py, Bryan L.
• Format: text
• Language: English
• Published: Animo Repository 2008
• Subjects: Business logistics > Mathematical models; Supply and demand; Inventory control; Industrial management; Prices; Manufactures; Production planning; System analysis; Engineering
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/2220
• Institution: De La Salle University

The personal computer (PC) industry is marked by quick product obsolescence and rapid price declines. Players in this industry face the unenviable task of matching supply with demand while at the same time contending with the constant decline in the values of their products. This study examines two mechanisms that manufacturers in the PC industry use to encourage cooperation from their distributors - price protection and product return subsidies. Price protection is a subsidy given to distributors when the price of a product drops during the planning horizon. Product return subsidies on the other hand is a rebate or payment made by the manufacturer to the distributor for products returned. The study approached the problem by formulating a mathematical model. The system consisted of four echelons with an echelon each for the suppliers, production facilities, distributors, and customers. Distributors were further classified as either manufacturer controlled or independent. Independent distributors had profit targets and were eligible for price protection and product return subsidies while manufacturer controlled distributors did not. The study found that for most cases, the optimal policy is to have price protection to either be zero or 100% of the total price drop. Price protection helped enhance manufacturer profit by allowing them to channel more products to distributors they controlled. Product return subsidies on the other hand, helped the manufacturer by encouraging independent distributors to hold inventory before demand peaks. This had the effect of using the independent distributors as storage.