Integrating Pricing And Distribution Decisions In Multiple Markets

Abstract

This paper deals with the simultaneous optimization of prices and shipment quantities in a supply network when the supplier has the market power to set prices, thereby influencing demand directly. We focus on the distribution stage of the supply chain where the firm’s products are shipped from several locations (plants, warehouses) to various independent markets, and address the following questions: (i) what is the best price at each market?, and (ii) what is the best distribution plan given these prices? The combined problem can be modeled as a nonlinear optimization problem. For its solution, we propose an iterative linear programming approach that utilizes shadow price information from a series of successive transportation problems. To evaluate the heuristic’s effectiveness, we compare it with a “brute-force” enumeration using a grid-search. The grid-search is implemented on a spreadsheet with a programming loop to facilitate repeated invocation of the transportation problem solver routine.