Quality and pricing decisions in production/inventory systems

Hamed Jalali*, Raïsa Carmen, Inneke Van Nieuwenhuyse, Robert Boute

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

In this article, we consider the impact of finite production capacity on the optimal quality and pricing decisions of a make-to-stock manufacturer. Products are differentiated along a quality index; depending on the price and quality levels of the products offered, customers decide to either buy a given product, or not to buy at all. We show that, assuming fixed exogenous lead times and normally distributed product demands, the optimal solution has a simple structure (this is referred to as the load-independent system). Using numerical experiments, we show that with limited production capacity (which implies load-dependent lead times) the manufacturer may have an incentive to limit the quality offered to customers, and to decrease market coverage, especially in settings where higher product quality leads to higher congestion in production. Our findings reveal that the simple solution assuming load-independent lead times is suboptimal, resulting in a profit loss; yet, this profit loss can be mitigated by constraining the system utilization when deciding on quality and price levels. Our results highlight the importance of the relationship between marketing decisions and load-dependent production lead times.

Original languageEnglish (US)
Pages (from-to)195-206
Number of pages12
JournalEuropean Journal of Operational Research
Volume272
Issue number1
DOIs
StatePublished - Jan 1 2019

Keywords

  • Inventory
  • Load-dependent lead time
  • Make-to-stock
  • Production-marketing
  • Quality and pricing decisions

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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