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A Stochastic Dynamic Programming Approach to Revenue Management in a Make-to-Stock Production System

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  • Quante, R.
  • Fleischmann, M.
  • Meyr, H.

Abstract

In this paper, we consider a make-to-stock production system with known exogenous replenishments and multiple customer classes. The objective is to maximize profit over the planning horizon by deciding whether to accept or reject a given order, in anticipation of more profitable future orders. What distinguishes this setup from classical airline revenue management problems is the explicit consideration of past and future replenishments and the integration of inventory holding and backlogging costs. If stock is on-hand, orders can be fulfilled immediately, backlogged or rejected. In shortage situations, orders can be either rejected or backlogged to be fulfilled from future arriving supply. The described decision problem occurs in many practical settings, notably in make-to-stock production systems, in which production planning is performed on a mid-term level, based on aggregated demand forecasts. In the short term, acceptance decisions about incoming orders are then made according to stock on-hand and scheduled production quantities. We model this problem as a stochastic dynamic program and characterize its optimal policy. It turns out that the optimal fulfillment policy has a relatively simple structure and is easy to implement. We evaluate this policy numerically and find that it systematically outperforms common current fulfillment policies, such as first-come-first-served and deterministic optimization.

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File URL: http://hdl.handle.net/1765/15183
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Bibliographic Info

Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2009-015-LIS.

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Date of creation: 12 Mar 2009
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Handle: RePEc:dgr:eureri:1765015183

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Web page: http://www.erim.eur.nl/

Related research

Keywords: revenue management; advanced planning systems; make-to-stock production; order fulfillment;

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  1. Quante, R. & Meyr, H. & Fleischmann, M., 2007. "Revenue Management and Demand Fulfillment: Matching Applications, Models, and Software," Research Paper ERS-2007-050-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  2. Kleijn, M.J. & Dekker, R., 1998. "An overview of inventory systems with several demand classes," Econometric Institute Report EI 9838, Erasmus University Rotterdam, Econometric Institute.
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