Optimal product pricing and lot sizing decisions for multiple products with nonlinear demands

Abstract

Most manufacturing firms consider product pricing as a key strategic decision. Production planning and scheduling, on the other hand, are mostly treated as a non-strategic decisions. Most businesses, therefore, follow some sequential decision-making process; where product prices are determined first and then operational plans are made to fulfill the resulting demand at the lowest possible cost. In this paper, we present a coordinated decision model approach for multi-product pricing and lot sizing decisions for a manufacturer who has limited production capacity. Although the presented model is specific to demands that follow constant elasticity of the price, it can easily be extended to other convex demand functions. We show that a coordinated decision-making process where price and production plans are determined simultaneously may lead to substantially higher profits. We propose an efficient solution methodology for finding optimal prices and product quantities and use real-world data to demonstrate the applicability of this research.