Dynamic coordination of production planning and sales admission control in the presence of a spot market

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

9 Scopus Citations
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Author(s)

  • Youyi Feng
  • Zhan Pang

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)309-329
Journal / PublicationNaval Research Logistics
Volume57
Issue number4
Publication statusPublished - Jun 2010

Abstract

We consider the decision-making problem of dynamically scheduling the production of a single make-to stock (MTS) product in connection with the product's concurrent sales in a spot market and a long-term supply channel. The spot market is run by a business to business (B2B) online exchange, whereas the long-term channel is established by a structured contract. The product's price in the spot market is exogenous, evolves as a continuous time Markov chain, and affects demand, which arrives sequentially as a Markov-modulated Poisson process (MMPP). The manufacturer is obliged to fulfill demand in the long-term channel, but is able to rein in sales in the spot market. This is a significant strategic decision for a manufacturer in entering a favorable contract. The profitability of the contract must be evaluated by optimal performance. The current problem, therefore, arises as a prerequisite to exploring contracting strategies. We reveal that the optimal strategy of coordinating production and sales is structured by the spot price dependent on the base stock and sell-down thresholds. Moreover, we can exploit the structural properties of the optimal strategy to conceive an efficient algorithm. © 2010 Wiley Periodicals, Inc.

Research Area(s)

  • Long-term channel, Make-to-stock (MTS) queue, Markov decision processes (MDP), Markov modulated poisson demand, Spot market