Joint Pricing and Production Decisions in an Assemble-to-Order System

Sechan Oh (), Karthik Sourirajan () and Markus Ettl ()
Additional contact information
Sechan Oh: IBM Research, San Jose, California 95120
Karthik Sourirajan: ZS Associates, Chicago, Illinois 60601
Markus Ettl: IBM Research, Yorktown Heights, New York 10598

Manufacturing & Service Operations Management, 2014, vol. 16, issue 4, 529-543

Abstract: This paper studies coordinated pricing and production decisions in an assemble-to-order system. We first show that unlike in make-to-stock systems, a state-dependent base-stock list-price policy is optimal. The optimal state-dependent base-stock levels and list prices may increase or decrease as demand backlogs increase, whereas demand backlogs always improve the optimal expected profit. Because the problem easily becomes intractable under general system settings, we next develop a simple heuristic policy. The heuristic policy decouples inventory replenishment, pricing, and component allocation decisions in a coordinated way. We provide a sufficient condition that ensures the optimality of the heuristic policy, and present a numerical study to demonstrate its performance when the condition is not met. The numerical study also shows how the performance of the heuristic policy is affected by various market and operational conditions, and by the structure of the assemble-to-order system. By focusing on the simple W-model, we show how the heuristic pricing decisions are made in response to changes in inventory levels and various cost parameters.

Keywords: assemble-to-order system; dynamic pricing; inventory control; heuristic policy; marketing–operations interface (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2014.0492 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:16:y:2014:i:4:p:529-543

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().