Theory of constraints based mafia offer for supply chains of deteriorating products

Abstract

Mafia offer is an unbelievably good offer that a company makes to its customers; the attractiveness of the offer makes it impossible for the customers to decline the offer and difficult for the competitors to match it [Cox, James, III, and John Schleier. 2010. Theory of Constraints Handbook. McGraw-Hill]. This study analyses the performance of one such offer that a producer of deteriorating items can make to its customers in the supply chain, such as retailers and distributors. The results from the analytical model show that the mafia offer increases the profits of both the producer and the retailer in a deteriorating items' supply chain. The efficacy of the proposed offer is tested for multiple combinations of ordering cost, wholesale price, and the retailer's cash constraints. The experimental results suggest that the producer would be able to increase its profits by more than 60%, for a given level of retailer's profits, owing to the mafia offer. The availability of the existing items offered by the retailer will increase significantly, despite a reduction in the retailer's inventory levels. The offer will result in an average increase of over 56% in the variety of items held by the retailer. The producer will also be able to command significantly higher margins (more than 44%) from the retailer for the existing items without adversely affecting the retailer's profitability.

Keywords:

• theory of constraints
• vendor-managed inventory
• retail supply chain
• mafia offers
• deteriorating items

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental data

Supplemental data for this article can be accessed at https://doi.org/10.1080/00207543.2019.1654629.

Notes

1 It must be noted that the nomenclature of a producer and retailer is used rather as a standard practice in this study. The producer need not be a manufacturer; in other words, the producer can be a supplier or a vendor who provides deteriorating items to its customer who, in turn, can be a retailer, dealer, or distributor. Since the model presented in this study is meant to be generic, the results obtained from the estimation of the model are expected to be readily applicable to a multi-echelon supply chain environment.

2 For example, if the producer is not willing to bear the costs of transportation (101), then the retailer has to bear the costs of deliveries from the producer (102).

3 It generally becomes difficult for the distributors and retailers to get loans from banks if their profitability is low.

4 Several companies complain that, despite increasing the credit limit, they regularly face problems while collecting money from their distributors and retailers and that most of their clients actually operate very close to the maximum permissible credit limit. In extreme cases, companies refuse to sell on credit to small distributors and retailers unless they pay in cash upfront; this results in a company policy that is similar to 125.

5 Reducing transportation costs is one of the most critical measurement tasks in logistics and supply chain departments. In this regard, a reduction in the frequency of transportation will decrease costs. In another case, the insistence on full truckload deliveries will lead to infrequent ordering.

6 In other words, the number of reviews performed in a given time period follows a Poisson distribution with rate $q_T$.

7 The manufacturing lead time is generally very less under the replenishment solution as the production in the producer's plant is managed according to the simplified drum buffer rope (SDBR) system (Schragenheim, Dettmer, and Patterson 2009). The plant maintains an adequate stock level in its finished goods warehouse (or shipping buffer), and the production replenishes the stock as per the actual consumption (Schragenheim and Dettmer 2000). The production is managed according to a DBR system that controls the manufacturing lead time by limiting the work-in-process (Dettmer 1998). This is achieved by choking the release of work in the production as per the rate of the capacity constrained resource (CCR) (Goldratt and Cox 1984).

8 Thus, the only way for the producer to sell such items is to reduce their wholesale prices significantly, which, in turn, reduces their attractiveness for the producer.

9 It may not even be possible for the producer to know the level of cash constraint of different retailers.

10 In fact, the producers generally use milk runs to replenish different distributors or retailers in a given area, thereby lowering the overall cost of transportation.

11 The increase in the total inventory at the retailer is due to the introduction of a wider variety of items.

12 Many companies have reported a significant cash release after implementing the replenishment solution (Goldratt 1999).