Developing a two stage stochastic programming model of the price and lead‐time decision problem in the multi‐class make‐to‐order firm

Pricing coordination and due‐date management are managerial challenges in today’s competitive marketplace. Segmenting orders into classes and allocating resources based on their sensitivity to time and price can increase a firm’s profit and its capacity utilization. In addition, other parameters such as production policy, inventory holding and delivery system should be considered in pricing and due‐date decisions. In this paper, we consider the role of flexibility in price, lead‐time and delivery in the make‐to‐order environment, where limited production capacity under a stochastic demand function is allowed. We develop a two‐stage stochastic programming model to determine the price, lead‐time and production amount jointly in each period. The difficulty of continuous distributions is avoided by using a scenario‐based approach for stochastic demand. Through numerical analyses, we indicate the benefits of flexibility in delivery, price and lead‐time in various environments.