Bid Price Control for Demand Fulfillment in a Make-to-Stock Production System

After three decades’ development, revenue management has become an active area of research. Its idea is not only applied in the traditional service industries such as airline, hotel and car rental, but also in manufacturing industry. In this paper, we consider the application of revenue management to a demand fulfillment problem of a make-to-stock (MTS) system, where the manufacturer is facing stochastic demand from heterogeneous customers with different unit revenues. We assume that inventory replenishments are scheduled exogenously and deterministic. The manufacturer has to decide for each order whether to satisfy it from stock, backorder it at a penalty cost, or reject it, in anticipation of more profitable future orders, with the objective to maximize the expected profit over a finite planning horizon, taking into account sales revenues, inventory holding costs, and backorder penalties.