Integrated optimisation of pricing, manufacturing, and procurement decisions of a make-to-stock system operating in a fluctuating environment

Karabağ, Oktay and Gökgür, Burak (2022) Integrated optimisation of pricing, manufacturing, and procurement decisions of a make-to-stock system operating in a fluctuating environment. International Journal of Production Research . ISSN 0020-7543 (Print) 1366-588X (Online) Published Online First

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Manufacturers experience random environmental fluctuations that influence their supply and demand processes directly. To cope with these environmental fluctuations, they typically utilise operational hedging strategies in terms of pricing, manufacturing, and procurement decisions. We focus on this challenging problem by proposing an analytical model. Specifically, we study an integrated problem of procurement, manufacturing, and pricing strategies for a continuous-review make-to-stock system operating in a randomly fluctuating environment with exponentially distributed processing times. The environmental changes are driven by a continuous-time discrete state-space Markov chain, and they directly affect the system's procurement price, raw material flow rate, and price-sensitive demand rate. We formulate the system as an infinite-horizon Markov decision process with a long-run average profit criterion and show that the optimal procurement and manufacturing strategies are of state-dependent threshold policies. Besides that, we provide several analytical results on the optimal pricing strategies. We introduce a linear programming formulation to numerically obtain the system's optimal decisions. We, particularly, investigate how production rate, holding cost, procurement price and demand variabilities, customers' price sensitivity, and interaction between supply and demand processes affect the system's performance measures through an extensive numerical study. Furthermore, our numerical results demonstrate the potential benefits of using dynamic pricing compared to that of static pricing. In particular, the profit enhancement being achieved with dynamic pricing can reach up to 15%, depending on the problem parameters.
Item Type: Article
Uncontrolled Keywords: dynamic programming; linear programming, dynamic pricing; Manufacturing systems; Markov modelling; stochastic models
Divisions: Sabancı Business School > Operations Management and Information Systems
Sabancı Business School
Depositing User: Burak Gökgür
Date Deposited: 09 Feb 2023 15:29
Last Modified: 09 Feb 2023 15:29

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