Optimal inventory threshold for a dynamic service make‐to‐stock system with strategic customers

Abstract

AbstractWe consider a make‐to‐stock production system with one product type, dynamic service policy, and delay‐sensitive customers. To balance the waiting cost of customers and holding cost of products, a dynamic production policy is adopted. If there is no customer waiting in the system, instead of shutting down, the system operates at a low production rate until a certain threshold of inventory is reached. If the inventory is empty and a new customer emerges, the system switches to a high production rate where the switching time is assumed to be exponentially distributed. Potential customers arrive according to the Poisson process. They are strategic in the sense that they make decisions on whether to stay for product or leave without purchase on the basis of on their utility value and the system information on whether the number of products is observable to customers or not. The strategic behavior is explored, and a Stackelberg game between production manager and customers is formulated where the former is the game leader. We find that the optimal inventory threshold minimizing the cost function can be obtained by a search algorithm. Numerical results demonstrate that the expected cost function in an observable case is not greater than that in an unobservable case. If a customer's delay sensitivity is relatively small, these two cases are entirely identical. With increasing of delay sensitivity, the optimal inventory threshold might be positive or zero, and hence, a demarcation line is depicted to determine when a make‐to‐stock policy is advantageous to the manager.