Optimal production and inventory policies of priority and price-differentiated customers

Date

2007-01-01

Author

Duran, Serhan
SİMCHİ-LEVİ, David
Swann, Julie L.

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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Many firms are exploring production and supply chain strategies when customers may be segmented into different classes based on service level or priority. Such segmentation can result in a more efficient production system as well as a better match between supply and demand. In this research, we analyze a system with customer classes 1 and 2, where customer class 1 has a higher priority of fulfillment than customer class 2 in the same period. We develop an optimal production and inventory strategy that rations current and future limited capacity between customer classes 1 and 2, through reserving inventory for the future and accepting orders now for future delivery when demand and production are general stochastic functions. We show that a modified order-up-to policy ( S*, R-i*, B-i*) is optimal in each period. S* is the targeted inventory level after production at the beginning of the period; R-1* represents the optimal inventory to be protected from being sold to both classes, and R-2* is the additional amount of inventory to protect from class 2. B-2* is the optimal amount of future capacity to make available to both classes through backlogging, and B-1* is the additional backlogging amount for class 1. Computational analysis shows that the differentiation strategy can result in a significant profit improvement over a traditional inventory policy.

Subject Keywords

Inventory policy, Tactical inventory, Customer differentiation, Threshold policies, Two-class, Priority differentiated, Price differentiated

URI

https://hdl.handle.net/11511/33070

Journal

IIE TRANSACTIONS

DOI

https://doi.org/10.1080/07408170600972982

Collections

Department of Industrial Engineering, Article

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Citation Formats

S. Duran, D. SİMCHİ-LEVİ, and J. L. Swann, “Optimal production and inventory policies of priority and price-differentiated customers,” IIE TRANSACTIONS, pp. 845–861, 2007, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/33070.