Optimization-and-Coordination-of-Fresh-Product-Sup

OptimizationandCoordinationofFreshProductSupplyChainswithFreshness-KeepingEffortXiaoqiangCaiDepartmentofSystemsEngineeringandEngineeringManagement,TheChineseUniversityofHongKong,Shatin,N.T.,HongKong,[e-mail]esearchCenterforContemporaryManagement,KeyResearchInstituteofHumanitiesandSocialSciencesatUniversities,SchoolofEconomicsandManagement,TsinghuaUniversity,Beijing100084,China,[e-mail],[e-mail]ess,NanjingUniversity,Nanjing210093,China,[e-mail]inwhichadistributorprocuresfromaproduceraquantityofafreshproduct,whichhastoundergoalong-distancetransportationtoreachthetargetmarket.Duringthetransportationprocess,thedistributorhastomakeanappropriateefforttopreservethefreshnessoftheproduct,andhissuccessinthisrespectimpactsonboththequalityandquantityoftheproductdeliveredtothemarket.Thedistributorhastodeterminehisorderquantity,leveloffreshness-keepingeffort,andsellingprice,bytakingintoaccountthewholesalepriceoftheproducer,thecostofthefreshness-keepingeffort,thelikelyspoilageoftheproductduringtransportation,andthepossibledemandfortheproductinthemarket.Theproducer,ontheotherhand,hastodeterminethewholesalepricebasedonitseffectontheorderquantityofthedistributor.Wedevelopamodeltostudythisproblem,andcharacterizeeachparty’soptimaldecisionsinbothdecen-tralizedandcentralizedsystems.Wefurtherdevelopanincentiveschemetofacilitatecoordinationbetweenthetwoparties.Computationalresultsarereportedtoshowtheeffectsoffreshness-keepingefforts.Keywords:supplychainmanagement;perishableproducts;coldchains;freshness-keepingeffort;pricingHistory:Received:December2007;Accepted:June2009,after3revisions.1.IntroductionTransportationandstorageoffreshproducts,suchasliveseafood,freshfruits,freshvegetables,andcutflowers,arechallengingandriskyoperations,duetothehighlyperishablenatureofsuchproducts.Boththeproducerandthedistributorcansuffersubstantiallosses.FergusonandKetzenberg(2006)havenotedthatgroceryretailersindevelopedWesterneconomiescanincurlossesofupto15percentduetodamageandspoilageofperishableitems.Inlessdevelopedcountries,whichlacksophisticatedtransportationfa-cilities,transportationoffreshproductscancauseevengreaterlosses.Forexample,accordingtoarecentAccenturereport,only15%ofallperishableproductsinChinaaretransportedinrefrigeratedvehicles(comparedwithnearly90%indevelopedcountries),resultinginalossof$8.9billionannuallyinfruitandvegetabledistribution.Thisrepresentsabout30%ofChina’sannualoutput(BoltonandLiu2006).Distributionoffreshproductsfallsinthecategoryof‘‘coldchains,’’inwhichtheproductsarekeptatlowtemperature.However,asindicatedbyKasmire(1999),allfreshproductsdeterioratewithtime,evenunderoptimumhandlingandtransportconditions.Preventingthespoilageofperishableproductsisthereforeanimportantpriorityforboththeproducerandthedistributor,especiallywhenthesupplychaininvolveslongdistancetransportation(as,e.g.,whenfreshflowersareexportedoverseas).Investingmoreresourcesinpreservativeefforts,byusingbetterpack-agingormorepowerfulcoolingfacilitiesorafastertransportationmode,helpstokeepspoilagetoamin-imum(Doris1998),butimposesaconsiderablecostontheproducerordistributor.Determiningthebesttrade-offbetweentheassociatedcostsandbenefitssoastooptimizethetotalprofitisthereforeacriticalproblemfacingfresh-productproducersanddistributors.Thispaperaimstoaddressthisproblem,bycon-sideringthefreshness-keepingeffortasadecisionvariableinthemodellingofthesupplychain.Inspeakingofthefreshness-keepingeffort,werefertothetotalcapitalinvestedtocontrolthespoilageoftheproductduringthedistributionprocess.Specifically,261PRODUCTIONANDOPERATIONSMANAGEMENTVol.19,No.3,May–June2010,pp.261–278ISSN1059-1478|EISSN1937-5956|10|1903|0261POMSDOI10.3401/poms.1080.01096r2009ProductionandOperationsManagementSocietywestudythefollowingproblem:Adistributorpro-curesaquantityofafreshproductfromaproducerandtransportsittoatargetmarketforsale.‘‘Obsoles-cence’’and‘‘deterioration’’mayoccurduringtrans-portation,whichcause‘‘quantityloss’’and‘‘qualitydrop’’(qualityreferstothefreshnessoftheproduct),respectively.Themarketdemandfortheproductde-pendsonthefreshnessoftheproductandthesellingprice.Thedistributorhastodecide:(i)thequantityheshouldorderfromtheproducer,(ii)thefreshness-keepingeffortheshouldinvestduringthetranspor-tationprocess,and(iii)thesellingpriceinthemarket.Theproducer,ontheotherhand,hastodeterminethewholesaleprice.Weconsiderdecisionmakingunderboththedecentralizedandcentralizedsettingsanddesignanincentiveschemethatcoordinatesthesup-plier–distributorchannel.Productsofoneorbothperishablecharacteristicsasdescribedaboveinclude,forexample,liveseafoodandfreshfruits.Liveseafood,suchascrab,lobster,andprawn,oftensuffersquantitylossowingtodeathduringtransportation,whereasfreshfruitsoftenex-periencequalitydeterioration—Whensuchaproductreachesthetargetmarketafteralong-distancetrans-portation,itbecomeslessfresh.Insomeoccasions,transportationoffreshfruitsincursnotonlyqualitydrop,butalsoquantityloss.Notet