Dynamic Pricing and Lead-Time Quotation for a Multiclass Make-to-Order Queue

• Published in: Management science Vol. 54; no. 6; pp. 1132 - 1146
• Main Authors: Celik, Sabri, Maglaras, Costis
• Format: Journal Article
• Language: English
• Published: Linthicum, MD INFORMS 01-06-2008; Institute for Operations Research and the Management Sciences
• Series: Management Science
• Subjects: Applied sciences; Business studies; Customer relationship management; Customers; diffusion; Diffusion control; dynamic pricing; Exact sciences and technology; Firm modelling; lead-time quotation; Logistics; Make to order; Management science; Marketing management; Mathematical vectors; Methods; Modeling; Operational research and scientific management; Operational research. Management science; Operations research; Price policy; Pricing; Pricing policies; Product management; Profit maximization; queueing; Queuing; Queuing theory; Queuing theory. Traffic theory; Revenue; revenue management; Sequencing; Studies; Workloads; United States; Profitability; Make to order; queueing; Multimarket; Return rate; Market price; Multiple production; Real time; Modeling; Recommendation; Lead time; Pricing; lead-time quotation; Multiple supplier; Dynamic programming; Tariffication; Queue; Sequencing; diffusion models; revenue management; dynamic pricing
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1070.0836

This paper considers a profit-maximizing make-to-order manufacturer that offers multiple products to a market of price and delay sensitive users, using a model that captures three aspects of particular interest: first, the joint use of dynamic pricing and lead-time quotation controls to manage demand; second, the presence of a dual sourcing mode that can expedite orders at a cost; and third, the interaction of the aforementioned demand controls with the operational decisions of sequencing and expediting that the firm must employ to optimize revenues and satisfy the quoted lead times. Using an approximating diffusion control problem we derive near-optimal dynamic pricing, lead-time quotation, sequencing, and expediting policies that provide structural insights and lead to practically implementable recommendations. A set of numerical results illustrates the value of joint pricing and lead-time control policies.