Price, delivery time, and capacity decisions in an M/M/1 make-to-order/service system with segmented market

Abstract

Speed and price are the two most important factors in customer satisfaction and business success in today’s competitive environment. Time-based product differentiation and segment pricing have provided firms with a great opportunity to profit enhancement. This paper presents a coding system for pricing/queuing models in the literature. In this article, a service/make-to-order firm with heterogeneous price and delivery time-sensitive customers as an M/M/1 queuing system is analyzed. The firm uses customers’ heterogeneity to create market segments. Products offered to each segment differ only in price and delivery time. The objective of this profit-maximizing firm is to determine optimal price, delivery time, and capacity for different market segments. Moreover, solving this problem can help to strategic decision making about supply chain decoupling point. An approach based on uniformization and matrix geometric method so as to calculate the distribution of low-priority customers’ time in system is developed. Then, the proposed pricing/queuing model is implemented by a numerical study and firm’s optimal decisions under shared and dedicated capacity strategies are analyzed and the effect of capacity costs and product substitution is studied. Finally, we have shown how firm’s decisions are influenced by market characteristics, capacity costs, and operational strategies.