A single-period stocking and pricing problem involving stochastic emergency supply

We develop a model for determining jointly optimal price and production policy of products with short life cycles subject to partially uncertain supply capacity. Within the price-setting newsvendor framework, we consider that demand in excess of the stocking quantity can be met by an emergency order. Due to the randomness of emergency supply capacity, it may not always be possible to satisfy the demand completely. Assuming that all customers are charged the same price, we explore the optimal sourcing and pricing decisions in the commonly used additive and multiplicative demand scenarios. The first-order conditions imply that the optimal price in the problem with random emergency supply is less than the optimal price associated with the deterministic demand problem when demand uncertainty is additive, and it is greater than the optimal price associated with the deterministic demand problem when demand uncertainty is multiplicative. We also find that the same type of comparative static applies in the multiplicative uncertainty case when there exists a dual source emergency system consisting of a perfectly reliable supplier and a second supplier with a stochastic capacity.

[1]  Xiaolin Xu,et al.  The effect of demand uncertainty in a price setting newsvendor model , 2008, 2008 International Conference on Service Systems and Service Management.

[2]  R. Akella,et al.  Diversification under supply uncertainty , 1993 .

[3]  Ye Lu,et al.  The Effect of Supply Uncertainty in Price-Setting Newsvendor Models , 2013, Eur. J. Oper. Res..

[4]  Marko Jakšič,et al.  Optimal inventory management with supply backordering , 2015 .

[5]  Stuart X. Zhu.  Dynamic replenishment from two sources with different yields, costs, and leadtimes , 2015 .

[6]  Fikri Karaesmen,et al.  Newsvendor models with dependent random supply and demand , 2014, Optim. Lett..

[7]  Yigal Gerchak,et al.  The Structure of Periodic Review Policies in the Presence of Random Yield , 1990, Oper. Res..

[8]  D. Simchi-Levi,et al.  Pricing and Inventory Management , 2012 .

[9]  J. Fransoo,et al.  Implications of outsourcing on operations planning: findings from the pharmaceutical industry , 2010 .

[10]  Doğan A. Serel,et al.  Production and pricing policies in dual sourcing supply chains , 2015 .

[11]  Xue-Ming Yuan,et al.  Optimal inventory policy with supply uncertainty and demand cancellation , 2011, Eur. J. Oper. Res..

[12]  Wenting Pan,et al.  TECHNICAL NOTE - Optimal Product Pricing and Component Production Quantities for an Assembly System Under Supply Uncertainty , 2010, Oper. Res..

[13]  Qi Feng,et al.  Integrating Dynamic Pricing and Replenishment Decisions Under Supply Capacity Uncertainty , 2010, Manag. Sci..

[14]  Qing Li,et al.  Joint Inventory Replenishment and Pricing Control for Systems with Uncertain Yield and Demand , 2006, Oper. Res..

[15]  Awi Federgruen,et al.  Combined Pricing and Inventory Control Under Uncertainty , 1999, Oper. Res..

[16]  Yanyi Xu,et al.  Wholesale-price contracts with postponed and fixed retail prices , 2012, Oper. Res. Lett..

[17]  Fikri Karaesmen,et al.  Newsvendor model with random supply and financial hedging: Utility-based approach , 2014 .

[18]  Dogan A. Serel,et al.  Optimal resource acquisition policy for a newsvendor under supply risk , 2014, J. Oper. Res. Soc..

[19]  Christopher S. Tang,et al.  Price, Rebate, and Returns Supply Contracts for Coordinating Supply Chains with Price‐Dependent Demands , 2010 .

[20]  S. Özekici,et al.  Mean-Variance Newsvendor Model with Random Supply and Financial Hedging , 2015 .

[21]  Xiang Li,et al.  Double marginalization and coordination in the supply chain with uncertain supply , 2013, Eur. J. Oper. Res..

[22]  T.C.E. Cheng,et al.  Optimal pricing and order quantity for the newsvendor problem with free shipping , 2012 .

[23]  E. Mills.  Uncertainty and Price Theory , 1959 .

[24]  Arnd Huchzermeier,et al.  Dual sourcing: Responsive hedging against correlated supply and demand uncertainty , 2012 .

[25]  Houmin Yan,et al.  The newsvendor problem with pricing: Extensions , 2006 .

[26]  Peter Kischka,et al.  The price-setting newsvendor with service and loss constraints , 2013 .

[27]  Mehmet A. Begen,et al.  Supply and demand uncertainty reduction efforts and cost comparison , 2016 .

[28]  Xiaoqiang Cai,et al.  Unimodality of price-setting newsvendor's objective function with multiplicative demand and its applications , 2011 .

[29]  Tammo H. A. Bijmolt,et al.  New Empirical Generalizations on the Determinants of Price Elasticity , 2005 .

[30]  Q. Feng,et al.  Sourcing from Multiple Suppliers for Price-Dependent Demands , 2011 .

[31]  Diwakar Gupta,et al.  Stochastic Comparisons in Production Yield Management , 2005, Oper. Res..

[32]  Mahmut Parlar,et al.  Inventory models with unreliable suppliersin a random environment , 1999, Ann. Oper. Res..

[33]  Vipul Agrawal,et al.  Impact of Uncertainty and Risk Aversion on Price and Order Quantity in the Newsvendor Problem , 2000, Manuf. Serv. Oper. Manag..

[34]  Kyle D. Cattani,et al.  Tailored capacity: Speculative and reactive fabrication of fashion goods , 2008 .

[35]  Ralph A. Winter,et al.  Vertical Control of Price and Inventory , 2007 .

[36]  Maqbool Dada,et al.  A Newsvendor's Procurement Problem when Suppliers Are Unreliable , 2007, Manuf. Serv. Oper. Manag..

[37]  Hong Chen,et al.  Joint replenishment and pricing decisions in inventory systems with stochastically dependent supply capacity , 2008, Eur. J. Oper. Res..

[38]  Maqbool Dada,et al.  Pricing and the Newsvendor Problem: A Review with Extensions , 1999, Oper. Res..

[39]  T. M. Whitin.  Inventory Control and Price Theory , 1955 .

[40]  Weidong Meng,et al.  A risk-averse newsvendor model under marketing-dependency and price-dependency , 2015 .

[41]  Meng Wu,et al.  The risk-averse newsvendor problem with random capacity , 2013, Eur. J. Oper. Res..

[42]  T. Morton,et al.  A periodic review, production planning model with uncertain capacity and uncertain demand—optimality of extended myopic policies , 1994 .

[43]  Doğan A. Serel,et al.  Inventory and pricing decisions in a single-period problem involving risky supply , 2008 .