Combined effects of price, process flexibility and modularity for reducing supply-demand mismatch

Abstract

One of the fundamental goals of any manufacturing firm irrespective of the industry is to minimize the supply-demand mismatches (SDM). To control SDM and the associated cost, firms use both the demand side (DS) and the supply side (SS) strategies. Considering that many firms use flexible capacity (SS strategy) and dynamic pricing (DS strategy) together to tackle SDM, one of the recent works (Ceryan et al., 2013) studies the same. They find that under the presence of flexible capacity the difference between the optimal prices of the products (2 product setting) remain constant when both the products are critically understocked. The result is of important consideration from the marketing perspective. Product prices are often used as a signal mechanism by firms to differentiate two products (quality difference) in their product line. Therefore, maintaining constant price gap over time is of great importance. This paper examines the dynamic pricing in the presence of flexible capacity and product architecture (SS strategy for reducing SDM). Unlike Ceryan et al. (2013) where they consider products as integrated in nature, we consider the products to be modular in nature. We also incorporate the notion of partial production postponement to make our analysis closer to the real world. We prove that in the presence of modular product architecture the price difference between the products remains constant for a larger state space region as compared to integrated product architecture.