Manufacturing and Service Operations Management 2002
Revenue Management of a Make-to-Stock Queue
Abstract
Motivated by recent electronic marketplaces, we consider a single-product make-tostock manufacturing system that uses two alternative selling channels: long-term contracts and a spot market of electronic orders. At time 0, the risk-averse manufacturer selects the long-term contract price, at which point buyers choose one of the two channels. The resulting long-term contract demand is a deterministic fluid, while the spot-market price is modeled as a geometric regulated Brownian motion that is correlated with the spot-market demand process. The manufacturer accepts or rejects each electronic order, and long-term contracts and accepted electronic orders are backordered if necessary. The manufacturer’s control problem is to select the optimal long-term contract price as well as the optimal production (i.e., busy/idle) and electronic-order admission policies to maximize revenue minus inventory holding and backorder costs. Under heavy traffic conditions, the problem is approximated by a diffusion control problem, and analytical approximations are used to derive a policy that is simple, and reasonably accurate and robust. 1
- DOI
- 10.1287/msom.4.1.4.288
- Sources
- openalex