Developing a two stage stochastic programming model of the price and lead-time decision problem in the multi-class make-to-order firm

Pricing coordination and due-date management are managerial challenges in today's competitive marketplace. Segmenting orders into classes and allocating resources based on their sensitivity to time and price can increase a firm's profit and its capacity utilization. In addition, other parameters such as production policy, inventory holding and delivery system should be considered in pricing and due-date decisions. In this paper, we consider the role of flexibility in price, lead-time and delivery in the make-to-order environment, where limited production capacity under a stochastic demand function is allowed. We develop a two-stage stochastic programming model to determine the price, lead-time and production amount jointly in each period. The difficulty of continuous distributions is avoided by using a scenario-based approach for stochastic demand. Through numerical analyses, we indicate the benefits of flexibility in delivery, price and lead-time in various environments. (C) 2011 Elsevier Ltd. All rights reserved.