Improving promotional effectiveness through supplier-retailer collaboration

In the consumer products industry, retail chains and manufacturers run promotions to maintain consumer and brand loyalty. The two major issues in planning and executing promotions are to accurately forecast demand and to control Out-of-Stock at the shelf. This thesis addresses both these issues. At the strategic level, "Collaborative, Planning, Forecasting and Replenishment" is used to define a process for two companies to collaboratively plan and execute promotions. At an operational level, the single period multi-item newsboy concept with a budget constraint is used to define an optimization model that helps determine the right budget and order quantities for products under a promotion at a targeted service level to improve profit or sales. The concept of Supply Contracts is researched to identify some ways that can be used to optimize the whole supply chain rather than just the retailer's. The value of optimal collaboration was confirmed in the results shown by the model. When optimizing the entire chain, the maximize profit optimization model achieved combined profit improvements of 37% as compared to an actual promotion. When only the retailer profit was maximized, the optimization model resulted in 5.9% profit improvements for the retailer and 0.3% profit improvements for the supplier as compared to an actual promotion. Finally, the revenue maximization model showed that after a certain point, increasing the budget did not result in increased service levels. This research can also be applied to new product launches, seasonality of products as well as daily replenishments. Thesis Supervisor: Dr. Lawrence Lapide Title: Research Director, Center for Transportation & Logistics Acknowledgements This thesis would not have been successful without the help and advice of many people. Firstly, we would like to thank our thesis advisor Dr. Larry Lapide for his direction and guidance throughout the process of writing this thesis. We would also like to thank Dr. Chris Caplice for his valuable insights and feedback even with all the other commitments he has. We would like to thank our thesis sponsors Allan and Jeff whose guidance, support and commitment from day one has been instrumental in making this thesis a success. -Gautam Kapur and Bin Liu I would like to thank my family, close friends and fellow MLOG students for providing me with the support through this challenging and exciting year. Their belief in my abilities and the motivation they have provided me has been critical to my success. I would like to especially thank my thesis partner Bin Liu for his contribution to this thesis. Bin's strong Operations Research background and energy to work non stop was extremely valuable. -Gautam Kapur I would like to thank my friends and colleagues at MLOG. First, I would like to thank Gautam Kapur for his contribution on our joint thesis with his rich consulting working experience. A big thank you and hug also goes out to Zen-Lee Chang, Debbie Becker, Sheau-Kai Lam, Robert MacKay and Jin Cao for their great help on my study at MIT. I would also like to extend my gratitude to my parents, Quande and Shuzhen, and my parents-in-law, Weizheng and Shouqing, for their full support. Finally, I would like to offer a sincere thanks to my family, my wife Lin Zhang and my two sons, Andi and Danny. Without their truly loving support, I could not have accomplished this success. -Bin Liu