Effect of supplier profit rate, cost reduction, and component commonality on the supply chain performance under stochastic and price‐dependent demand

Manufacturers add product variants in one product family to meet customers' different preferences. Components could be shared and reused to reduce costs. Demand and demand variance change with different sale prices under the stochastic and price‐sensitive demand environment. Demand uncertainty has significant effects on costs and profits of the supply chain. With a numerical example involving a product family of cordless drills, a model is used to investigate the effect of supplier profit rate, cost reduction, and component commonality on the supply chain performance. Results show that saving in upstream suppliers due to component commonality could be passed to the manufacturer, retailer, and customers with appropriate coordination models such as quantity discount. With reduced procedure cost, a win‐win pricing strategy for one supplier is to increase its profit at a rate while sell its products at a cheaper sale price based on the cost mark‐up method considering the demand uncertainty from buyers or downstream suppliers in the supply chain.