Swimsuit Supply Chain Optimization with Revenue Sharing: Maximizing Profit in a Two-Company Model

This case study examines a swimsuit supply chain involving a retailer and a manufacturer, focusing on the impact of a revenue-sharing agreement on profit optimization. The retailer faces customer demand and orders swimsuits from the manufacturer before the selling season. The manufacturer produces and delivers the ordered quantity. Demand is assumed to be random and follows a discrete distribution.

The original scenario involves a $80 wholesale price per unit. However, a new agreement introduces a lower wholesale price of $55 per unit, with the retailer sharing 20% of its sales revenue with the manufacturer. The objective is to determine the optimal ordering quantity for the retailer and analyze the resulting profits for both companies and the total supply chain.

Using the new wholesale price and revenue-sharing agreement, the retailer's profit can be calculated as follows:

Profit = (130 - 55) * Q * (1 - F) - C_s * (Q - D) * F

where:

• Q is the ordering quantity
• F is the probability of demand being fulfilled
• C_s is the salvage value per unit ($15)
• D is the total demand

To find the optimal ordering quantity, we take the derivative of the profit function with respect to Q and set it equal to zero:

d(Profit)/dQ = (130 - 55) * (1 - F) - C_s * F = 0

Solving for F, we get:

F = (130 - 55) / (130 - 55 + C_s) = 0.625

Substituting F back into the profit function and solving for Q, we get:

Q = √[(2 * D * C_s) / (130 - 55)] = √[(2 * 5000 * 15) / 75] ≈ 115

Therefore, the optimal ordering quantity for the retailer is 115 units.

The expected profits for the retailer, manufacturer, and the total supply chain can be calculated as follows:

• Retailer profit: (130 - 55) * 115 * (1 - 0.625) - 15 * (115 - 5000 * 0.625 * 0.8) ≈ $4,406.25
• Manufacturer profit: 55 * 115 * 0.2 * 0.625 - 100,000 - 30 * 115 ≈ -$26,875
• Total supply chain profit: Retailer profit + Manufacturer profit ≈ -$22,468.75

This analysis reveals that while the new pricing agreement reduces the wholesale price for the retailer, the manufacturer's revenue increases through revenue sharing. However, the overall supply chain profit decreases due to the decline in the retailer's profit and the manufacturer's fixed production cost. This highlights the complex interplay between pricing, revenue sharing, and profit optimization within a supply chain. Further analysis could explore different revenue-sharing models and demand scenarios to optimize the overall profitability of the supply chain.