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Multi-item supply chain and revenue management problems

Joern Meissner, 2005
Faculty Advisor: Awi Federgruen


The areas of Revenue Management and Supply Chain Management represent two fundamental pillars for the management of industries that procure and distribute consumer products. The former is concerned with the management of the demand processes and the development of methodologies and systems required to support this management function. The area of Supply Chain Management is concerned with the design of a supply process to match a given demand pattern as efficiently as possible. It may therefore be viewed as the complement of the Revenue Management area.

Operations management papers have demonstrated that the operational environment and associated cost structures may have a fundamental impact on the equilibrium behavior in the industry, in general, and the resulting price levels in particular. Little remains known, however, about how prices should be set in a competitive environment, in the simultaneous presence of two other major complications: (i) time dependent demand functions and cost parameters, and (ii) scale economies in the operational costs.

Conversely, traditional inventory and procurement planning models assume that the demand processes for the finished goods are exogenously given, when, in reality, these demand processes can be managed by appropriate price choices, inter alia. It is of critical importance to understand how effective replenishment strategies are affected by pricing decisions and how replenishment strategies and pricing decisions are to be integrated effectively.

This dissertation focuses on the following four areas of complicating factors affecting the union of Supply Chain Management and Revenue Management: (A) Pricing Decisions. Here we distinguish between two types of settings. In the first case, the firm operates as a monopolist or in an environment of imperfect competition, with the competitors' prices (temporarily) fixed. In the second case, prices need to be determined in an environment of imperfect, oligopolistic competition. (B) Time-dependent demand functions and cost structures. (C) Economies of scale in the operational cost. These arise, for example, from fixed cost components in the procurement processes, i.e. production and distribution setup costs. (D) Capacity Limitations, i.e. limits on how many units can be produced in any given period or, in the aggregate, over the complete planning horizon. Such capacity limits often create interdependencies between different products sharing the same production or distribution equipment.

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