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COORDINATED PRICING AND INVENTORY CONTROL WITH BATCH PRODUCTION AND ERLANG LEADTIMES

Published online by Cambridge University Press:  27 June 2014

Zhan Pang  and
Frank Y. Chen
Zhan Pang
Affiliation:
Lancaster University Management School, Lancaster, LA1 4YX, UK E-mail: z.pang@lancaster.ac.uk
Frank Y. Chen
Affiliation:
Department of Management Science, The City University of Hong Kong, Hong Kong E-mail: youhchen@cityu.edu.hk
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Abstract

This paper addresses a joint pricing and inventory control problem for a batch production system with random leadtimes. Assume that demand arrives according to a Poisson process with a price-dependent arrival rate. Each replenishment order contains a single batch of a fixed lot size. The replenishment leadtime follows an Erlang distribution, with the number of completed phases recording the delivery state of outstanding orders. The objective is to determine an optimal inventory-pricing policy that maximizes total expected discounted profit or long-run average profit. We first show that when there is at most one order outstanding at any point in time and that excess demand is lost, the optimal reorder policy can be characterized by a critical stock level and the optimal pricing decision is decreasing in the inventory level and delivery state. We then extend the analysis to mixed-Erlang leadtime distribution which can be used to approximate any random leadtime to any degree of accuracy. We further extend the analysis to allowing three outstanding orders where the optimal reorder point becomes state-dependent: the closer an outstanding order is to its arrival or the more orders are outstanding, the lower selling price is charged and the lower reorder point is chosen. Finally, we address the backlog case and show that the monotone pricing structure may not be true when the optimal reorder point is negative.

Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 28 , Issue 4 , October 2014 , pp. 529 - 563
Copyright
Copyright © Cambridge University Press 2014 

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