Pass-through Constrained Vendor Funds for Promotion Planning

Abstract

We analyze how pass-through constrained vendor funds impact promotion planning of both suppliers and retailers. Vendor funds are trade deals in which a supplier offers a retailer a short-term discount on a specific product, encouraging the retailer to discount the product. Past vendor funds have had significant shortcomings. In this paper, we propose the pass-through constrained vendor fund in which the supplier requires the retailer to pass-through a minimal fraction of the discount. The vendor fund offer and selection problem is modeled as a bi-level optimization problem in which a supplier wishes to determine what pass- through constrained vendor fund to offer to a retailer that can accept or reject the offer. First, we formulate the lower-level retailer model as an integer quadratic optimization model to help retailers decide on which vendor funds to accept. Using Lagrangian relaxation methods we create an efficient algorithm with theoretical guarantees and near-optimal performance on Oracle Retail client data. Second, we analyze a bi-level supplier model to determine which vendor fund a supplier should offer. We show that the vendor fund with pass- through constraint mitigates forward-buying by the retailer and coordinates supply chains on the short-term.