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.