A choice-based approach to dynamic capacitated multi-item lot sizing with demand uncertainty

Abstract

With the purpose of planning and implementing pricing decisions on a tactical level as well as production decisions on an operational level, we consider – in an integrated form – the capacitated multi-item lot sizing problem with uncertain item demands and price-dependent discrete choice demand. The model is embedded into an overarching rolling horizon procedure allowing for adaptations to changes in demand and cost parameters. We first formulate the static problem version as a nonlinear mathematical program with underlying multinomial logit demand and subsequently linearize it to make it viable for mathematical programming solvers. Uncertainty of demands is taken into account by Monte Carlo simulation. More specifically, we generate random demand scenarios and utilize them as input data for the sample average approximation problem version. We further endow the problem setting with possibilities to incorporate pricing policy requirements such as restricting the number of price adaptations or defining periods without price adaptations. Overall, the developed approach yields a powerful tool for balancing item demands via pricing in a way favorable for adhering to available production capacities and thereby striking a balance between revenues and costs. Computational results confirm that adapting prices to time-dependent demand and cost parameters is exploited effectively to maintain a deliberately controlled production environment. Moreover, the integrated pricing and production setting allows to study the effect of pricing policy restrictions and demand uncertainties upon attainable profits.