IDEAS home Printed from https://ideas.repec.org/a/bla/popmgt/v32y2023i10p3119-3137.html
   My bibliography  Save this article

Dynamic pricing and production control in a two‐item make‐to‐stock system with flexible dual sourcing and lost sales

Author

Listed:
  • Ruobing Li
  • Li Xiao
  • Dacheng Yao

Abstract

We consider a joint control of pricing and production in a two‐item inventory system, where each item can be produced by its dedicated source or a shared flexible source, under the lost‐sales setting. The demands of the two items are correlated. Due to the complexity caused by the lost‐sales assumption and the interplay between pricing and production decisions, we show the optimal value function satisfies five structural properties under certain conditions. The optimal ordering and pricing policies are then fully characterized by five production curves and two pricing functions. Different from existing literature, we show that the optimal price path may not be monotone in the inventory level of either item. Next, we estimate the value of flexibility by comparing two systems, one with the flexible source only and the other with the dedicated source only, and show that the value of flexibility is positive (or negative) if the flexible source has a faster (or slower) production rate and a lower (or higher) production cost. Through numerical experiments, we find that in most cases flexibility and dynamic pricing are substitutes except for a few exceptions; and product substitution can either increase or decrease the value of flexibility.

Suggested Citation

  • Ruobing Li & Li Xiao & Dacheng Yao, 2023. "Dynamic pricing and production control in a two‐item make‐to‐stock system with flexible dual sourcing and lost sales," Production and Operations Management, Production and Operations Management Society, vol. 32(10), pages 3119-3137, October.
    • Handle: RePEc:bla:popmgt:v:32:y:2023:i:10:p:3119-3137
    DOI: 10.1111/poms.14026
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/poms.14026
    Download Restriction: no
    File URL: https://libkey.io/10.1111/poms.14026?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Nicholas C. Petruzzi & Maqbool Dada, 1999. "Pricing and the Newsvendor Problem: A Review with Extensions," Operations Research, INFORMS, vol. 47(2), pages 183-194, April.
    2. Awi Federgruen & Aliza Heching, 1999. "Combined Pricing and Inventory Control Under Uncertainty," Operations Research, INFORMS, vol. 47(3), pages 454-475, June.
    3. Shiming Deng & Candace A. Yano, 2006. "Joint Production and Pricing Decisions with Setup Costs and Capacity Constraints," Management Science, INFORMS, vol. 52(5), pages 741-756, May.
    4. Xin Chen & Zhan Pang & Limeng Pan, 2014. "Coordinating Inventory Control and Pricing Strategies for Perishable Products," Operations Research, INFORMS, vol. 62(2), pages 284-300, April.
    5. Nan Yang & Renyu Zhang, 2014. "Dynamic Pricing and Inventory Management Under Inventory-Dependent Demand," Operations Research, INFORMS, vol. 62(5), pages 1077-1094, October.
    6. Yi Yang & Youhua (Frank) Chen & Yun Zhou, 2014. "Coordinating Inventory Control and Pricing Strategies Under Batch Ordering," Operations Research, INFORMS, vol. 62(1), pages 25-37, February.
    7. Albert Y. Ha, 1997. "Inventory Rationing in a Make-to-Stock Production System with Several Demand Classes and Lost Sales," Management Science, INFORMS, vol. 43(8), pages 1093-1103, August.
    8. Xin Chen & David Simchi-Levi, 2004. "Coordinating Inventory Control and Pricing Strategies with Random Demand and Fixed Ordering Cost: The Infinite Horizon Case," Mathematics of Operations Research, INFORMS, vol. 29(3), pages 698-723, August.
    9. Yoichiro Fukuda, 1964. "Optimal Policies for the Inventory Problem with Negotiable Leadtime," Management Science, INFORMS, vol. 10(4), pages 690-708, July.
    10. Xiting Gong & Xiuli Chao & Shaohui Zheng, 2014. "Dynamic Pricing and Inventory Management with Dual Suppliers of Different Lead Times and Disruption Risks," Production and Operations Management, Production and Operations Management Society, vol. 23(12), pages 2058-2074, December.
    11. Oben Ceryan & Ozge Sahin & Izak Duenyas, 2013. "Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 86-101, April.
    12. Jing-Sheng Song & Paul Zipkin, 2009. "Inventories with Multiple Supply Sources and Networks of Queues with Overflow Bypasses," Management Science, INFORMS, vol. 55(3), pages 362-372, March.
    13. Kaijie Zhu & Ulrich W. Thonemann, 2009. "Coordination of pricing and inventory control across products," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(2), pages 175-190, March.
    14. T. M. Whitin, 1955. "Inventory Control and Price Theory," Management Science, INFORMS, vol. 2(1), pages 61-68, October.
    15. Qing Li & Peiwen Yu, 2014. "Multimodularity and Its Applications in Three Stochastic Dynamic Inventory Problems," Manufacturing & Service Operations Management, INFORMS, vol. 16(3), pages 455-463, July.
    16. Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
    17. Xin Chen & Peng Hu & Stephen Shum & Yuhan Zhang, 2016. "Dynamic Stochastic Inventory Management with Reference Price Effects," Operations Research, INFORMS, vol. 64(6), pages 1529-1536, December.
    18. Dacheng Yao, 2017. "Joint pricing and inventory control for a stochastic inventory system with Brownian motion demand," IISE Transactions, Taylor & Francis Journals, vol. 49(12), pages 1101-1111, December.
    19. Qing Li & Shaohui Zheng, 2006. "Joint Inventory Replenishment and Pricing Control for Systems with Uncertain Yield and Demand," Operations Research, INFORMS, vol. 54(4), pages 696-705, August.
    20. Jianjun Xu & Shaoxiang Chen & Gangshu (George) Cai, 2020. "Optimal policy for production systems with two flexible resources and two products," IISE Transactions, Taylor & Francis Journals, vol. 52(2), pages 199-215, February.
    21. Shixin Wang & Xuan Wang & Jiawei Zhang, 2021. "A Review of Flexible Processes and Operations," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1804-1824, June.
    22. Xin Chen & Menglong Li, 2021. "Discrete Convex Analysis and Its Applications in Operations: A Survey," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1904-1926, June.
    23. Jiri Chod & Nils Rudi, 2005. "Resource Flexibility with Responsive Pricing," Operations Research, INFORMS, vol. 53(3), pages 532-548, June.
    24. Gregory A. DeCroix & Antonio Arreola-Risa, 1998. "Optimal Production and Inventory Policy for Multiple Products Under Resource Constraints," Management Science, INFORMS, vol. 44(7), pages 950-961, July.
    25. Xin Chen & David Simchi-Levi, 2004. "Coordinating Inventory Control and Pricing Strategies with Random Demand and Fixed Ordering Cost: The Finite Horizon Case," Operations Research, INFORMS, vol. 52(6), pages 887-896, December.
    26. Stephen M. Gilbert, 2000. "Coordination of Pricing and Multiple-Period Production Across Multiple Constant Priced Goods," Management Science, INFORMS, vol. 46(12), pages 1602-1616, December.
    27. Jiri Chod & Jianer Zhou, 2014. "Resource Flexibility and Capital Structure," Management Science, INFORMS, vol. 60(3), pages 708-729, March.
    28. Wedad Elmaghraby & P{i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
    29. Zhan Pang & Frank Y. Chen & Youyi Feng, 2012. "Technical Note---A Note on the Structure of Joint Inventory-Pricing Control with Leadtimes," Operations Research, INFORMS, vol. 60(3), pages 581-587, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sangjo Kim & Youyi Feng & Jianjun Xu, 2023. "Complementarity analysis of a multi‐item inventory model with leading product pricing," Production and Operations Management, Production and Operations Management Society, vol. 32(12), pages 4190-4211, December.
    2. Nan Yang & Renyu Zhang, 2022. "Dynamic pricing and inventory management in the presence of online reviews," Production and Operations Management, Production and Operations Management Society, vol. 31(8), pages 3180-3197, August.
    3. Xiting Gong & Youhua (Frank) Chen & Quan Yuan, 2022. "Coordinating Inventory and Pricing Decisions Under Total Minimum Commitment Contracts," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 511-528, February.
    4. Gurkan, M. Edib & Tunc, Huseyin & Tarim, S. Armagan, 2022. "The joint stochastic lot sizing and pricing problem," Omega, Elsevier, vol. 108(C).
    5. Nan Yang & Renyu Zhang, 2022. "Comparative Statics Analysis of An Inventory Management Model with Dynamic Pricing, Market Environment Fluctuation, and Delayed Differentiation," Production and Operations Management, Production and Operations Management Society, vol. 31(1), pages 341-357, January.
    6. Boxiao Chen & Xiuli Chao & Cong Shi, 2021. "Nonparametric Learning Algorithms for Joint Pricing and Inventory Control with Lost Sales and Censored Demand," Mathematics of Operations Research, INFORMS, vol. 46(2), pages 726-756, May.
    7. Li, Mengmeng & Mizuno, Shinji, 2022. "Dynamic pricing and inventory management of a dual-channel supply chain under different power structures," European Journal of Operational Research, Elsevier, vol. 303(1), pages 273-285.
    8. Wen Chen & Adam J. Fleischhacker & Michael N. Katehakis, 2015. "Dynamic pricing in a dual‐market environment," Naval Research Logistics (NRL), John Wiley & Sons, vol. 62(7), pages 531-549, October.
    9. Bhatia, Nishika & Gülpınar, Nalan & Aydın, Nurşen, 2020. "Dynamic production-pricing strategies for multi-generation products under uncertainty," International Journal of Production Economics, Elsevier, vol. 230(C).
    10. Oben Ceryan & Ozge Sahin & Izak Duenyas, 2013. "Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 86-101, April.
    11. Peng Hu & Ye Lu & Miao Song, 2019. "Joint Pricing and Inventory Control with Fixed and Convex/Concave Variable Production Costs," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 847-877, April.
    12. Jadidi, Omid & Taghipour, Sharareh & Zolfaghari, Saeed, 2016. "A two-price policy for a newsvendor product supply chain with time and price sensitive demand," European Journal of Operational Research, Elsevier, vol. 253(1), pages 132-143.
    13. Brian Tomlin & Yimin Wang, 2008. "Pricing and Operational Recourse in Coproduction Systems," Management Science, INFORMS, vol. 54(3), pages 522-537, March.
    14. Yongbo Xiao, 2018. "Dynamic pricing and replenishment: Optimality, bounds, and asymptotics," Naval Research Logistics (NRL), John Wiley & Sons, vol. 65(1), pages 3-25, February.
    15. Xiong‐zhi Wang & Guo‐qing Wang, 2019. "Integrating dynamic pricing and inventory control for fresh‐agri product under consumer choice," Australian Economic Papers, Wiley Blackwell, vol. 58(1), pages 96-111, March.
    16. Li, Yang & Liu, Feng, 2021. "Joint inventory and pricing control with lagged price responses," International Journal of Production Economics, Elsevier, vol. 241(C).
    17. Yin, Rui & Rajaram, Kumar, 2007. "Joint pricing and inventory control with a Markovian demand model," European Journal of Operational Research, Elsevier, vol. 182(1), pages 113-126, October.
    18. Lap Mui Ann Chan & David Simchi-Levi & Julie Swann, 2006. "Pricing, Production, and Inventory Policies for Manufacturing with Stochastic Demand and Discretionary Sales," Manufacturing & Service Operations Management, INFORMS, vol. 8(2), pages 149-168, January.
    19. Wen Chen & Ying He, 2022. "Dynamic pricing and inventory control with delivery flexibility," Annals of Operations Research, Springer, vol. 317(2), pages 481-508, October.
    20. Georgia Perakis & Melvyn Sim & Qinshen Tang & Peng Xiong, 2023. "Robust Pricing and Production with Information Partitioning and Adaptation," Management Science, INFORMS, vol. 69(3), pages 1398-1419, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:popmgt:v:32:y:2023:i:10:p:3119-3137. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1937-5956 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.