Joint management of finished goods inventory and demand process for a make-to-stock product: A computational approach
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AbstractIn this paper, we consider the joint management of finished goods inventory and demand for a product in a make-to-stock production system. The production process is random with controllable mean rate, and the demand process is stochastic with changeable mean rate dependent on the sale price being high or low. The management issue is how to dynamically adjust the production rate and the sale price to maximize the long run total discounted profit. We show that: 1) the optimal management of the finished goods inventory follows a base stock policy: when the inventory is above certain base stock level, the production is halted; otherwise the maximum production rate is deployed to raise the inventory to the base stock level; and 2) the optimal management of the demand process follows a price switch threshold policy: when the inventory is above the threshold, the low sale price is chosen to sell the product; and below it the high price is chosen to reduce the demand. We provide an algorithm to compute the base stock level and price switch threshold. Extension to multiple price choices is given with proofs highlighted.
All Author(s) ListChen LX, Feng YY, Ou JH
Journal nameIEEE Transactions on Automatic Control
Year2006
Month2
Day1
Volume Number51
Issue Number2
PublisherIEEE-INST ELECTRICAL ELECTRONICS ENGINEERS INC
Pages258 - 273
ISSN0018-9286
eISSN1558-2523
LanguagesEnglish-United Kingdom
Keywordsdemand process management; dynamic pricing; finished goods inventory management; make-to-stock production; Poisson demand; production control
Web of Science Subject CategoriesAutomation & Control Systems; AUTOMATION & CONTROL SYSTEMS; Engineering; Engineering, Electrical & Electronic; ENGINEERING, ELECTRICAL & ELECTRONIC

Last updated on 2020-30-03 at 00:37