Optimal start time of a markdown sale under a two-echelon inventory system

The importance of inventory management for perishable items has been steadily attracting attention. Because of the characteristics of items whose values drop precipitously or cannot be sold after a particular time, items should be disposed of by a markdown sale. Accordingly, the company makes the following decisions at the end of the selling season: (a) selection on which products to be discounted, (b) pricing of the product, and (c) timing of the sale. Extant literature on the inventory problem has mainly focused on investigating decisions on selecting products for discount and the amount of the discount. That is, the decision on the start time of the markdown sale was not extensively studied. This study focuses on the optimal combination of a start time of the markdown sale and an order quantity based on a newsvendor model. Under certain conditions in a decentralized system, the start time of a markdown sale, where the retailer obtains the highest profit, is the least profitable for the manufacturer. Therefore, we propose a revenue-sharing contract to avoid irrational ordering behavior by a retailer against a manufacturer. Centralization through the revenue-sharing contract improves the profits of the retailer and manufacturer compared to those earned in the decentralized system.