Using flexible products to cope with demand uncertainty in revenue management

Abstract

While flexible products have been popular for many years in practice, they have only recently gained attention in the academic literature on revenue management. When selling a flexible product, a firm retains the right to specify some of its details later. The relevant point in time is after the sale, but often before the provision of the product or service, depending on the customers' need to know the exact specification in advance. The resulting flexibility can help to increase revenues if capacity is fixed and the demand to come difficult to forecast. We present several revenue management models and control mechanisms incorporating this kind of flexible products. An extensive numerical study shows how the different approaches can mitigate the negative impact of demand forecast errors.

Revenue Management in a Multi-Stage Make-to-Order Production System

“…Revenue management of flexible products Petrick et al, 2010Petrick et al, , 2012Gönsch et al, 2014) allows the company to delay the assignment of customers to specific products (e.g., a specific flight). These decisions are made only after all requests for the flexible products have arrived, which enables the company to use capacities more efficiently.…”

“…The main difference from models in the literature on MTO-RM (Spengler et al, 2007;Hintsches et al, 2010) and FP-RM Petrick et al, 2010Petrick et al, , 2012 is that in the SDP (4), there are two different time levels at which decisions are made. Order acceptance decisions are made immediately after order arrival, while order release decisions are only made at the beginning of each planning period.…”

Revenue Management in an Assemble-to-Order Production System

“…extend this approach to a network setting with an arbitrary number of periods, which vastly increases the size of the dynamic program such that they introduce a bid price approach to solve the problem heuristically. Petrick et al (2012) further extend this concept by introducing a novel model formulation that allows for reallocation of the execution mode for flexible products and a more general choice of the notification date.…”

“…To cope with this problem, we follow the ideas of and Petrick et al (2012). Let the periods in which it is feasible to start assembly for an order d with given due date t form the set…”

Using Dynamic Programming Decomposition for Revenue Management with Opaque Products

“…and Gallego, Iyengar, Phillips, and Dubey (2004) first introduced and investigated the concept of flexible products. Petrick, Steinhardt, Gönsch, and Klein (2012) further analyzed flexible products' potential to compensate for imprecise demand forecasts. Petrick, Gönsch, Steinhardt, and Klein (2010) developed several dynamic control mechanisms that allow for flexible products' practical integration into existing capacity control systems.…”