Optimal production and selling policies with fixed-price contracts and contingent-price offers

Cheng-Yuan Ku*, Yi Wen Chang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This paper investigates optimal production and selling decisions for a single supplier with two types of customers. Specifically, risk-averse buyers would rather pay higher fixed prices with guaranteed supply contracts whereas risk-prone buyers prefer to secure remaining stocks and pay lower contingent prices. This study formulized this problem with a dynamic programming model and analyzed it further using successive approximations. Theoretical results indicate that no controls are needed for fixed-price orders. However, thresholds exist for manufacturing and contingent-price ordering policies. These two types of threshold planes increased with the addition of waiting customers. Furthermore, a sensitivity analysis of seasonal factors revealed that the optimal threshold plane shifts upward during high demand periods.

Original languageEnglish
Pages (from-to)94-101
Number of pages8
JournalInternational Journal of Production Economics
Volume137
Issue number1
DOIs
StatePublished - 1 May 2012

Keywords

  • Contingent prices
  • Dynamic programming
  • Manufacturing and selling decisions
  • Optimal policy
  • Sensitivity analysis

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