Optimal production and pricing policies in a combined make-to-order/make-to-stock system

Abstract

In this paper, we consider a production system which is capable to produce two types of products. The first type of products is make-to-order, while the second type is make-to-stock whose demand is satisfied by the on-hand inventory. The demand arrival rates of both types of products are price-sensitive. The excess demand that cannot be satisfied immediately is either backlogged or lost. The system costs include the holding costs of product inventories and shortage costs of unsatisfied demand. The objective is to maximise the total discounted profit over an infinite planning horizon by coordinating the production process and pricing decisions. By analysing the properties of objective functions, we characterise the optimal control policy by two switch curves and the optimal price is also given for different ordering and inventory levels. We also explore the monotonicity of both switch curves which will reduce the computation effort. Numerical experiments are conducted to demonstrate the use of the switch curves in managing the production system and illustrate that compared with the static pricing policy, the optimal integrated price and inventory control policy can result in a significant profit improvement in the make-to-order/make-to-stock system that is much higher than in a single-product system.

Keywords:

• make-to-order
• make-to-stock
• dynamic pricing
• pricing policy
• switch curve

Acknowledgements

The authors thank Editor-in-Chief, Alexandre Dolgui, the anonymous AE and the two referees for many critical and constructive comments, which greatly helped to improve the paper.

Notes

1 The first author is supported by the National Natural Science Foundation of China [grant number 71272128], Program for New Century Excellent Talents in University [grant number NCET-12-0087] and the third author by the National Natural Science Foundation of China [grant number 71201142].