Quality and pricing decisions in production/inventory systems

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

European Journal of Operational Research, 2019, vol. 272, issue 1, 195-206

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.

Keywords: Inventory; Quality and pricing decisions; Make-to-stock; Production-marketing; Load-dependent lead time (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:272:y:2019:i:1:p:195-206

DOI: 10.1016/j.ejor.2018.06.013

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