A clearing function based bid-price approach to integrated order acceptance and release decisions

Abstract

In this paper, we consider the order acceptance and order release decisions of a manufacturer facing order-specific demand. In contrast to previous literature, both demand and production are stochastic. We develop a novel bid-price-based revenue management approach to solve this decision problem. The production system is modeled using clearing functions to capture the non-linear inter-dependency of workload and lead times in stochastic production systems. In extant literature, a common approach to cope with variability in a production system is to introduce fixed, workload-independent lead times. We show in a numerical study that our newly developed approach based on clearing functions clearly outperforms this fixed lead time approach.