Dynamic replenishment, production, and pricing decisions in the face of supply disruption and random price-sensitive demand

We study a joint decision problem for replenishment, production, pricing strategies in the face of both supply and demand uncertainties. The supply of the raw material suffers from a potential supply disruption while the demand for the finished goods is price-sensitive and random. We assume that the raw material is storable and unfilled demands are fully backordered. We characterize the optimal policies for raw-material replenishment, finished-goods production, and pricing. We find that the optimal replenishment policy is an order-up-to type for a given finished-goods stock level while it is a threshold type for a given raw-material stock level. For either a given finished-goods stock level or a given raw-material stock level, the optimal production policy is a threshold type and the optimal pricing policy is a modified list-price type, respectively. (C) 2013 Elsevier B.V. All rights reserved.