Lead-time setting, capacity utilization, and pricing decisions under lead-time dependent demand

Lead-time setting, capacity utilization, and pricing decisions under lead-time dependent demand

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Article ID: iaor2002616
Country: United States
Volume: 30
Issue: 2
Start Page Number: 151
End Page Number: 163
Publication Date: Feb 1998
Journal: IIE Transactions
Authors: , ,
Keywords: M/M/1 queues
Abstract:

This research examines the lead-time setting, capacity utilization, and pricing decisions facing a firm serving customers that are sensitive to quoted lead-times. We model the firm's operations as an M/M/1 queque and treat the demand as being linear in price and quoted lead-time. We analyze the quoted lead-time, capacity utilization, and price that maximize revenues less total variable production costs, WIP holding costs, and lateness penalty costs. We use this analysis to show that the capacity utilization should be lower when (1) customers are more sensitive to lead-times and/or (2) the firm incurs higher congestion related costs and/or (3) the penalty for lateness is higher. Further, we study the robustness of optimal profit contributions when the model parameters are mis-estimated.

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