Pricing decision and lead time quotation in supply chains with an endogenous demand sensitive to lead time and price

Along with the price, the delivery lead time has become a key factor of competitiveness for companies and an important purchase criterion for many customers. Nowadays, firms are more than ever obliged to meet their quoted lead time, which is the delivery lead time announced to the customers. The combination of pricing and lead time quotation implies new trade-offs and offers opportunities for many insights. For instance, on the one hand, a shorter quoted lead time can lead to an increase in the demand but also increases the risk of late delivery and thus may affect the firm’s reputation and deter future customers. On the other hand, a longer quoted lead time or a higher price generally yields a lower demand. Despite the strategic role of joint pricing and lead time quotation decisions and their impacts on demand, in the operations management literature an exogenous demand (a priory a known demand) is generally used in supply chain models, even if the design of the supply chain has a strong impact on lead times (i.e., sites location, inventory position, etc.) and thus affects the demand. Therefore, we are interested in the lead time quotation and pricing decisions in a context of endogenous demand (i.e., demand sensitive to price and quoted lead time). The literature dealing with pricing and lead time quotation under an endogenous demand mainly considered a make to order (MTO) context. A pioneer paper, Palaka et al. (1998), investigated this issue by modeling the company as an M/M/1 queue, and our work follows their footsteps. Our review of the literature allowed to identify new perspectives for this problem, which led to three main contributions in this thesis.In our first contribution, using Palaka et al.’s framework, we consider the unit production cost to be a decreasing function in quoted lead time. In most published papers, the unit production cost was assumed to be constant. In practice, the unit production cost generally depends on the quoted lead time. Indeed, the firm can manage better the production process and reduce the production cost by quoting longer lead time to the customers.In the second contribution, we still consider Palaka et al.’s framework but model the firm as an M/M/1/K queue, for which demand is rejected if there are already K customers in the system. In the literature on single firm setting following Palaka et al.’s research, only the M/M/1 queue was used, i.e., where all customers are accepted, which might lead to long sojourn times in the system. Our idea is based on the fact that rejecting some customers, might help to quote shorter lead time for the accepted ones, which might finally lead to a higher profitability, even if in the first glance we lose some demand.In the third contribution, we study a new framework for the lead time quotation and pricing problem under endogenous demand as we model the supply chain by two production stages in a tandem queue (M/M/1-M/M/1). In the literature with multi-firm setting, all papers considered that only one actor has production operations and the other actor has zero lead time. We investigated both the centralized and decentralized decision settings.For each problem studied, we formulated a profit-maximization model, where the profit consists of a revenue minus the production, storage and lateness penalty costs, and provides the optimum result (analytically or numerically). These resolutions led us to demonstrate new theoretical results (such as the expected lateness in an M/M/1/K, and the sufficient condition required to satisfy the global service constraint in a tandem queue by only satisfying the local service constraints). We also conducted numerical experiments and derived managerial insights.