Fair and profitable: How pricing and lead-time quotation policies can help

Abstract

In this paper, we propose four policies to serve price and lead-time sensitive customers with a single type of product produced in an M/GI/1 type make-to-stock queueing system. The policies are developed to observe certain principles of fairness: if a customer is quoted a longer lead-time, she/he must be charged a lower price and a significant proportion of the deliveries has to be made during the quoted lead times. Although handling non-exponential service times in this setting presents difficulties, our analysis of the proposed policies is exact. Two of the policies operate with static prices, while one of the two dynamic pricing policies also quotes dynamic lead times. By construction of the policies, we show that the dynamic pricing policies are more profitable. Numerical examples bring additional light by showing that in small markets with oversensitive customers, dynamic policies can be profitable while static pricing policies can fail. In a larger market, a simple dynamic policy charging two prices depending on the stock availability can be a reasonable compromise. Dynamic policies tend to suffer less against high production time variability as well.