Inventory control and pricing with alternative lead times

Abstract

Based on the recognition that customers are both price and lead-time sensitive, sellers nowadays often pursue a delivery-time based market segmentation strategy. In this paper, we consider an inventory model where the seller provides two delivery options with possible delivery upgrade. The inventory is replenished in cycles and within each cycle, the seller employs commitment control to allocate its on-hand inventory between two classes of customers. We develop the optimal inventory allocation and replenishment policies, and demonstrate that the optimal control can be characterized by a switching curve. In the further analysis, we subsume dynamic pricing as an effective means to balance the two demand streams. Finally, we investigate similarities and differences between the pricing and delivery upgrade strategies.

Key words： inventory control; revenue management; pricing; dynamic programming; lead time; delivery upgrade

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