Price and inventory policy strategy model in a price sensitive dual channel supply chain structure considering product substitution

Abstract

Dual channel supply chain structure, which utilizes both online and traditional offline channel, is widely adopted by a lot of companies. The structure offers better market coverage and profitability. Despite the advantages, it also brings some challenges to coordinate the strategy of the channel. This paper proposes a pricing and inventory policy model to achieve better performance of the structure, where a product substitution was introduced in the offline channel. A price sensitive linear demand function was also incorporated in this EOQ model. The model then evaluated by analysing the profit in two scenarios, the Stackelberg Leadership scenario and Total Profit scenario. The results show that the total profit of this structure is higher under Total Profit scenario, in which the supply chain entities make decision simultaneously. The model also shows that the product substitution gives a positive effect to the profit and become a competitive advantage of the offline channel.