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Quality and pricing decisions in production/inventory systems
Jalali, Hamed Raïsa, Carmen Van Nieuwenhuyse, Inneke Boute, Robert
Jalali, Hamed
Raïsa, Carmen
Van Nieuwenhuyse, Inneke
Boute, Robert
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2019
Journal
European Journal of Operational Research
Book
Publication Volume
272
Publication Issue
1
Publication Begin page
195
Publication End page
206
Publication Number of pages
Collections
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.
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Keywords
Inventory, Quality and Pricing Decisions, Make-to-Stock, Productionmarketing, Load-dependent Lead Time