Dynamic Pricing and Inventory Control in a Make-to-Stock Queue With Information on the Production Status

This paper addresses the dynamic pricing problem of a single-item, make-to-stock production system. Demand arrives according to Poisson processes with changeable arrival rate dependent on the selling price. Item processing times follow an Erlang distribution, which allows to use the information on the production status in a tractable way. The objective is to identify a dynamic control policy that decides production and adjusts the price to maximize the long-run total discounted profit. An optimal policy is based on the so-called work-storage level that captures the information of the inventory level and the status of ongoing production process. Specifically, we show that: 1) the finished goods inventory is optimally managed by a critical stage level policy: when the inventory is below a certain work-storage level, production is started if the system is currently idle and 2) the price is optimally set by threshold levels: a certain price is posted when the work-storage level is at or below a threshold corresponding to that level of price. Moreover, we develop an efficient algorithm to compute the optimal policy. Note to Practitioners-As a new information-capturing technology, Radio Frequency Identification (RFID) is being widely believed to be the next great solution to supply chain management. A wide adoption of RFID across the supply chain will bring significant benefits, such as improved inventory accuracy, and increased visibility of stock. However, how to value these benefits remains challenging. In a broader perspective, if we regard manufacturing as one node along the supply chain, then RFID also allows retailers to closely monitor the movement of their orders throughout their supply chains, from suppliers to freight forwarders, to ports and ocean carriers, and finally to distribution centers. Without this information, which corresponds to the situation where no RFID is used, the system may operate as if there is no information on the status of the production process. This paper proposes a model which may eventually be developed into a solution for assessing the revenue (or gross profit) that is derived without the information on the production status and the revenue (or gross profit) that is derived from such information that would be brought about through the use of RFID. The difference between the revenue (or gross profit) in the two situations can then help solidify the quantification of the value of RFID.