Dynamic Coordination of Production Planning and Sales Admission Control in the Presence of a Spot Market

We consider the decision-making problem of dynamically scheduling the production of a single make-to stock (MTS) product in connection with the product's concurrent sales in a spot market and a long-term supply channel. The spot market is run by a business to business (B2B) online exchange, whereas the long-term channel is established by a structured contract. The product's price in the spot market is exogenous, evolves as a continuous time Markov chain, and affects demand, which arrives sequentially as a Markov-modulated Poisson process (MMPP). The manufacturer is obliged to fulfill demand in the long-term channel, but is able to rein in sales in the spot market. This is a significant strategic decision for a manufacturer in entering a favorable contract. The profitability of the contract must be evaluated by optimal performance. The current problem, therefore, arises as a prerequisite to exploring contracting strategies. We reveal that the optimal strategy of coordinating production and sales is structured by the spot price dependent on the base stock and sell-down thresholds. Moreover, we can exploit the structural properties of the optimal strategy to conceive an efficient algorithm. (C) 2010 Wiley Periodicals, Inc. Naval Research Logistics 57: 309-329, 2010